[Senate Hearing 107-]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107- 441
 
                 NOMINATIONS OF: ROGER W. FERGUSON, JR.
                ANGELA M. ANTONELLI, RONALD A. ROSENFELD
                 JENNIFER L. DORN, AND DONALD E. POWELL
=======================================================================

                                HEARINGS

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

                            NOMINATIONS OF:

 ROGER W. FERGUSON, JR., OF MASSACHUSETTS, TO BE A MEMBER OF THE BOARD 
               OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
                               __________

 ANGELA M. ANTONELLI, OF VIRGINIA, TO BE CHIEF FINANCIAL OFFICER, U.S. 
              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                               __________

           RONALD A. ROSENFELD, OF OKLAHOMA, TO BE PRESIDENT
         GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)
            U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                               __________

  JENNIFER L. DORN, OF NEBRASKA, TO BE FEDERAL TRANSIT ADMINISTRATOR, 
                   U.S. DEPARTMENT OF TRANSPORTATION
                               __________

             DONALD E. POWELL, OF TEXAS, TO BE A MEMBER AND
               CHAIRMAN OF THE BOARD OF DIRECTORS OF THE
                 FEDERAL DEPOSIT INSURANCE CORPORATION
                               __________

                        JUNE 13, 21 AND 26, 2001
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts         RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
JACK REED, Rhode Island              WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina         RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia                 JIM BUNNING, Kentucky
                                     MIKE CRAPO, Idaho
                                     DON NICKLES, Oklahoma

           Steven B. Harris, Staff Director and Chief Counsel
             Wayne A. Abernathy, Republican Staff Director
                  Martin J. Gruenberg, Senior Counsel
                        Sarah A. Kline, Counsel
                  Jonathan Miller, Professional Staff
                    Jennifer Fogel-Bublick, Counsel
      Brian J. Gross, Republican Deputy Staff Director and Counsel
         Melody H. Fennel, Republican Professional Staff Member
           Sherry E. Little, Republican Legislative Assistant
         Madelyn Simmons, Republican Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor

                                  (ii)











                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JUNE 13, 2001

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1
    Prepared statement...........................................    29

Opening statements, comments, or prepared statements of:
    Senator Bunning..............................................     4
    Senator Corzine..............................................     5
    Senator Stabenow.............................................     5
    Senator Gramm................................................     6
    Senator Bennett..............................................     7
    Senator Schumer..............................................    17

                                NOMINEE

Roger W. Ferguson, Jr., of Massachusetts, to be a Member of the 
  Board of Governors of the Federal Reserve System...............     8
    Biographical sketch of nominee...............................    31
    Response to written questions of Senator Sarbanes............    39

              Additional Material Supplied for the Record

Letter to Senator Paul S. Sarbanes from Eight Members of the 
  House of Representatives, dated June 12, 2001..................    47
Response to questions of Eight Members of the House of 
  Representatives from Roger W. Ferguson, Jr., dated June 12, 
  2001...........................................................    54

                              ----------                              

                        THURSDAY, JUNE 21, 2001

Opening statement of Chairman Sarbanes...........................    59

Opening statements, comments, or prepared statements of:
    Senator Nickles..............................................    61
    Senator Stabenow.............................................    63
    Senator Carper...............................................    63
    Senator Allard...............................................    68
        Prepared statement.......................................    92
    Senator Reed.................................................    72

                               WITNESSES

George Allen, a U.S. Senator from the State of Virginia..........    61
Ron Wyden, a U.S. Senator from the State of Oregon...............    62
Gordon Smith, a U.S. Senator from the State of Oregon............    71

                                NOMINEES

Angela M. Antonelli, of Virginia, to be Chief Financial Officer, 
  U.S. Department of Housing and Urban Development...............    64
    Biographical sketch of nominee...............................    93
Ronald A. Rosenfeld, of Oklahoma, to be President, Government 
  National Mortgage Association (Ginnie Mae), U.S. Department of 
  Housing and Urban Development..................................    66
    Biographical sketch of nominee...............................   110
    Response to written questions of Senator Carper..............   127









Jennifer L. Dorn, of Nebraska, to be Federal Transit 
  Administrator, U.S. Department of Transportation...............    80
    Prepared statement...........................................   118
    Biographical sketch of nominee...............................   120
    Response to written questions of Senator Carper..............   128

                              ----------                              

                         TUESDAY, JUNE 26, 2001

Opening statement of Chairman Sarbanes...........................   129
    Prepared statement...........................................   145

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................   131
    Senator Johnson..............................................   132
    Senator Enzi.................................................   133
    Senator Miller...............................................   133
    Senator Corzine..............................................   134
    Senator Bennett..............................................   134
    Senator Dodd.................................................   141
    Senator Bunning..............................................   145

                               WITNESSES

Kay Bailey Hutchison, a U.S. Senator from the State of Texas.....   129
Larry Combest, a U.S. Representative in Congress from the State 
  of Texas.......................................................   134
William ``Mac'' Thornberry, a U.S. Representative in Congress 
  from the State of Texas........................................   135

                                NOMINEE

Donald E. Powell, of Texas, to be a Member and Chairman of the 
  Board of Directors of the Federal Deposit Insurance Corporation   136
    Biographical sketch of nominee...............................   146
    Response to written questions of:
        Senator Sarbanes.........................................   159
        Senator Miller...........................................   160





                             NOMINATION OF:
                         ROGER W. FERGUSON, JR.
                  OF MASSACHUSETTS, TO BE A MEMBER OF
                     THE BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM

                              ----------                              

                        WEDNESDAY, JUNE 13, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:40 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The Committee will come to order.
    Before we turn to Governor Ferguson, I would like to take 
just a couple of moments to talk about the agenda of the 
Committee in the coming weeks.
    First of all, let me say that I am appreciative to Senator 
Gramm for the cooperative way in which he has ensured a smooth 
transition. We tried to work together when things were reversed 
and I look forward to continuing to try to do that.
    I also want to note that we reached a Memorandum of 
Understanding at the beginning of this Congress that we would 
not alter the staff or the funding ratios over the term of this 
Congress. And so, that will continue. We did that agreement in 
part I think to give the staff some sense of security as they 
looked ahead, I think it was wise to do it then and I continue 
to think it is wise. Obviously, we will adhere to that 
agreement.
    Now, we have a short-term pressing agenda with a number of 
items that need to be reauthorized, and that I see is the first 
order of business. Let me just mention them very briefly.
    First, we have to reauthorize the Export-Import Bank, which 
is due to expire on September 30. I have asked Senator Bayh, 
the Chairman of the International Trade and Finance 
Subcommittee to take responsibility for holding the hearing. 
There will be a hearing next Tuesday afternoon on reauthorizing 
the Export-Import Bank.
    Mr. Robson, the new Chairman is now in place. Actually, I 
think he was sworn in yesterday at the Ex-Im Bank. He will be 
available to testify.
    Second, we need to reauthorize the Multifamily Assisted 
Housing Reform and Affordability Act, the so-called mark-to-
market program for multifamily housing. That authority is due 
to expire on September 30. Senator Reed, Chairman of the 
Housing and Transportation Subcommittee, has scheduled a 
hearing on that reauthorization for next Tuesday morning.
    Third, the Defense Production Act expires on October 12. 
Senator Schumer, Chairman of the Subcommittee on Economic 
Policy, will assume the responsibility of holding that hearing. 
We are trying to arrange a hearing before the end of the month.
    The Iran-Libya Sanctions Act, which imposes sanctions on 
foreign companies which make investments directly and 
significantly in contributing to the enhancement of the ability 
of Iran or Libya to develop its petroleum resources, expires on 
August 5. Over 70 Members of the Senate have cosponsored its 
reauthorization and I hope to hold a Full Committee hearing on 
that again before the recess. I would very much like to do 
that.
    These are four measures whose authorization runs out. If we 
can do the hearings, then we can turn to a markup sometime 
after the 4th of July recess. In other words, when we come back 
in July.
    The Administration, as I understand it, is supportive of 
reauthorization in all four of these instances. I am not sure 
they have fully developed their position in detail on each 
issue, but it is my understanding that they do support 
reauthorization.
    So this would be consistent with that agenda.
    I also want to note, as you will recall, we also reported 
out the reauthorization of the Export Administration Act. That 
legislation is now pending in the Senate. Both Senator Gramm 
and I have talked to the leadership about it and we hope that 
there will be some opportunity to get that back up and move 
ahead on that. There was a 1 year temporary extension of that 
Act. We need to address that question. That is the one we 
brought out 19 to 1, as Members will recall.
    Finally, last year we passed the Manufactured Housing 
Improvement Act. It desperately needs a technical correction, 
which is very time sensitive, in order to be able to spend out 
the funds collected under the program to run the program. I 
have consulted with the Administration, with Senator Gramm, and 
with other Members of the Committee on legislation. It is a 
very technical thing and we hope that we can get legislation up 
by unanimous consent and move that through and correct that 
situation.
    Next Wednesday, the Committee will hold an oversight 
hearing on the condition of the banking system. We are doing 
this really as just kind of a survey of the situation. I am not 
prompted to do it by any sense of crisis or looming problem, 
but I think it would be helpful to get Alan Greenspan, Chairman 
of the Fed; Jerry Hawke, Comptroller of the Currency; Donna 
Tanoue, Chair of the FDIC; and Ellen Seidman, Director of the 
Office of Thrift Supervision, and have them in.
    In addition, we will address nominations as they come to us 
and as their papers are ready for hearings. We will try to do 
that in an expeditious manner.
    Now later in the summer, as Members know, I have some 
interest in the predatory lending and the financial privacy 
issues, and I hope to have some hearings on those issues. Money 
laundering, financial education, and literacy are other issues. 
Then, I hope we can do a set of hearings on the state of 
metropolitan and rural America, the broader jurisdiction of the 
Committee.
    I have been talking to Members. I hope to complete that 
process of consultation over the next couple of weeks, for any 
ideas they have or directions they would like to go. I am 
anxious to hear from them and we are very open to suggestions.
    Now with that by way of preface, and if there are any 
questions, I would be happy to respond in that area. We need to 
do these reauthorizations. We were already working on doing 
that and we just want to carry forward that process and try to 
bring it to completion.
    With that as a preface, I would like to welcome Roger 
Ferguson before the Committee this morning. He has been 
nominated by the President for a full 14 year term as a Member 
of the Board of Governors of the Federal Reserve.
    Governor Ferguson was originally appointed as a Member in 
1997, to complete a term which expired on January 31, 2000. He 
was nominated on September 14, 1999, by President Clinton for a 
full term as a Member of the Federal Reserve Board, as well as 
to be Vice Chairman. He was confirmed as Vice Chairman at the 
end of September 1999, and that term expires on October 5, 
2003. That is a 4 year term as Vice Chairman. No action was 
taken in the last Congress on his nomination to be a Member of 
the Board. So he had the Vice Chairmanship while he continued 
to serve, but he had not gotten another term as a Board Member.
    President Bush nominated him for a full term on April 24. 
His papers are all complete. They have been with the Committee 
now for a number of weeks. Given the importance of the 
position, and the period of time he has been awaiting action on 
his nomination, I thought we should move his nomination, and 
Senator Gramm and I have discussed that.
    I just want to say that Governor Ferguson holds an 
undergraduate, a law degree, and a Ph.D. in economics, all from 
Harvard. After graduate school, he practiced law in New York 
with Davis, Polk & Wardwell, one of the leading firms. He then 
joined the consulting firm of McKinsey & Company, where he 
became a Partner in 1992 and Director of Research and 
Information Systems. As I said, he has served on the Federal 
Reserve Board since 1997.
    By all accounts, Governor Ferguson has served with 
distinction as a Member of the Federal Reserve Board. I have a 
public statement that Alan Greenspan issued today:

    Roger Ferguson has been a distinguished and respected 
Member of the Federal Reserve Board, exercising sound judgment 
and benefiting our work on a wide range of domestic and 
international policy matters. I welcome his nomination to 
another term on the Board.

    Governor Ferguson has chaired a working group of the 
Federal Open Market Committee to review its disclosure 
practices. Acting on a working group recommendation, the 
Federal Open Market Committee altered its disclosure practices, 
including deciding to issue a statement after every FOMC 
meeting announcing any action taken by the Federal Open Market 
Committee and indicating the balance of risks facing the 
economy.
    I for one very much welcome this initiative. I think it is 
important for the Federal Open Market Committee to make its 
decisions known and to try to give the country some of the 
rationale that lies behind its decision. I think that increases 
economic understanding and that is a very important objective.
    Governor Ferguson oversaw the Fed's preparations for the 
Year 2000 computer challenge. I think Senator Bennett worked 
with him on that, when Senator Bennett and Senator Dodd were 
heading up the Special Committee. He also served as Chairman of 
the Joint Year 2000 Council, sponsored by the Bank for 
International Settlements, to provide guidance to the global 
financial supervisory community. He recently completed service 
as Chairman of the Group of Ten Working Party on Financial 
Sector Consolidation, which examined the causes and potential 
effects of consolidation in the financial sector worldwide.
    As Vice Chairman, he has served as the Federal Reserve's 
Chief Administrative Officer. He is currently Co-Chairman of 
the Federal Reserve's Payments System Development Committee, 
which addresses public policy issues arising in connection with 
developments in the Nation's payments infrastructure.
    Governor Ferguson has also been a careful observer of the 
economy, and has focused particularly on the role of 
information technology in productivity growth.
    Actually, I think it is a commentary on the high 
professional standards he has set during his service on the 
Federal Reserve Board that he was nominated for a full term on 
the Board by both President Clinton and President Bush. At the 
time of his first confirmation, and I was taken with this, I 
recall that he mentioned that the appointment of Andrew Brimmer 
to the Federal Reserve served as an inspiration to him as a 
youth and focused his attention on serving on the Federal 
Reserve as a possible career goal. Perhaps his own service on 
the Federal Reserve now will serve as an inspiration to other 
young people to pursue public service in their careers.
    I am very pleased to welcome Governor Ferguson before the 
Banking Committee. And Governor, before we turn to you, I will 
yield to any of my colleagues who may want to make a statement.
    Senator Bunning. I have a short opening statement I would 
like to make.
    Chairman Sarbanes. Indeed. Senator Bunning.

                COMMENTS OF SENATOR JIM BUNNING

    Senator Bunning. Mr. Chairman, I would like to thank you 
for holding this hearing, and I want to thank Mr. Ferguson for 
testifying today.
    Mr. Ferguson, I appreciate you coming to see me last week. 
I think we covered a lot of ground. At that time, I expressed 
my strong concerns with the Fed talking about the financial 
markets. Obviously, every time the Chairman speaks, the market 
listens. But I am concerned that the Fed has tried to influence 
market levels. That is not the Fed's job. I am very much 
heartened by the fact that you agreed with me that it is not 
the Fed's job to jawbone the equity markets.
    You obviously have had a very distinguished career and I 
look forward to hearing your answers to the questions posed by 
my colleagues and myself today.
    Thank you very much, Mr. Chairman.
    Chairman Sarbanes. Thank you, Senator Bunning.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman. It is an honor 
for me to be here today with you in your first hearing as 
Chairman.
    Like my colleagues, I look forward to working with you on 
ensuring financial institutions and markets in America stay on 
the same supreme role that they play today. Those efforts were 
the hallmark of the outstanding leadership provided by Senator 
Gramm as well in his stewardship of this Committee and I look 
forward to them continuing.
    I am particularly pleased to hear you outline the issues 
that are on the agenda. Issues like predatory lending, 
financial privacy, housing affordability, urban economic 
development, and financial literacy are things that I think 
really can make a difference in improving the quality of life 
for individuals and their families. I think it is terrific that 
we will have this agenda.
    I also want to say welcome to Vice Chairman Ferguson, who 
is an individual who has a sterling reputation in the financial 
markets. His work on all of a host of things that often are 
unseen is terrific testimony to his talent and wisdom and it is 
a pleasure to have him here today and I look forward to his 
testimony.
    Chairman Sarbanes. Senator Stabenow.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    I too want to indicate my pleasure at seeing you in the 
Chair and also appreciate Senator Gramm's leadership of the 
Committee. It has been a pleasure to work with both of you and 
I look forward to the opportunity for us to be working together 
on both sides of the aisle.
    I am very appreciative of the agenda that you have put 
forward for the Committee and am anxious to work with you on so 
many things that directly affect my Michigan residents.
    In terms of today, I would like to indicate that, as we 
know, our economy has experienced a great deal of uncertainty 
over the last several months. We have gone from a period of 
exuberant optimism to a dot com bust.
    The 1990's were an unprecedented period of growth and 
economic expansion in our Nation. Today, however, energy prices 
are soaring. Many stocks have reached shocking new lows. And 
unemployment continues to rise.
    This is not the economy of the recent past, but a new time 
of uncertainty and nervousness. Whether we are talking about 
the iron ore miners in the upper peninsula of Michigan or the 
high-tech executives in Oakland County, Michigan's automation 
alley, everybody in Michigan and everybody in the country is 
affected by the decisions of the Federal Reserve.
    As we make the transition into the new economy, it has 
become all the more imperative that the Federal Reserve act 
aggressively to keep our economy in strong shape. Combating 
inflation and fighting unemployment are critical to our 
country's well-being, as I know that you are aware.
    The Federal Reserve has taken several steps over the last 
year to address the troubling economic signs. I hope that they 
will remain vigilant in promoting sound monetary policy, 
particularly with the recent massive and, I believe, ill-
advised, changes in our Nation's fiscal policy.
    I welcome Mr. Ferguson and I look forward to hearing your 
thoughts today on the state of the economy, and your work at 
the Federal Reserve. And we appreciate your being here.
    Thank you.
    Chairman Sarbanes. Senator Gramm.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Mr. Chairman, thank you. I had to run out to 
speak to a bishop who had returned my call. I depend on the 
Lord's help in so many ways. When his messengers call, I don't 
keep them holding.
    First of all, Mr. Chairman, I want to congratulate you on 
being the new Chairman of this Committee, and I want to thank 
you for your kindness in working with me over the period of 
time that I was Chairman. I would like to also thank Members on 
the Republican side for their support. I had the great good 
fortune of being Chairman when a lot of good things happened, 
and your support was critical. I want to personally thank you 
for your kindness to me. I want to also thank Members on the 
Democrat side, especially the new Members for their kindness to 
me at the beginning of this term. I look forward to working 
with all of you.
    Mr. Chairman, I think you have set an example as to what a 
good Ranking Minority Member should be, and one that I hope to 
emulate. There are obviously areas where you and I will not be 
in total agreement, but I want to assure you that when in 
doubt, I intend to try to be supportive.
    The outline that you have presented--a reauthorization of 
the Ex-Im Bank, multifamily housing, the Defense Production 
Act, the Iran-Libya Sanctions Act--these represent bills that 
have broad support, and I have no doubt that we can pass 
legislation fairly rapidly in reauthorizing them.
    I have a few concerns about the Defense Production Act, not 
that I don't think the President ought to have these 
extraordinary powers, but I do believe in the past that they 
have been abused when we were not dealing with periods of 
national emergency. This is something I want to ask the 
Committee to look at, so that we might set a little higher 
standard and threshold for using the Defense Production Act. 
President Nixon used it to impose price controls in a period 
when we were not facing a national emergency from a conflict 
somewhere in the world. We have used it to allocate resources 
from time to time when there were no defense implications. And 
so, not that I believe this President would ever abuse the 
power, but these laws should be based on not knowing who might 
be President someday.
    Let me also say that I think our correction on manufactured 
housing is something that we can do very quickly. Maybe we 
could get the Committee to do it by unanimous consent on the 
floor, if you wanted to do it that way.
    I look forward to working with you, and again, I 
congratulate you on your Chairmanship.
    I want to congratulate Roger Ferguson. When you have Alan 
Greenspan on your side, you have the right man on your side. I 
supported confirming you as Vice Chairman, and I intend to 
support confirming you to a new term. I appreciate your 
willingness to serve. I understand that given your excellent 
credentials, you could make a lot more money doing something 
else, and I appreciate that you are willing to give that up to 
serve at the Federal Reserve.
    I am proud of the fact that under my tenure as Chairman we 
raised pay for members of the Federal Reserve Board, but we did 
not raise it enough so that I can get the presidents of 
regional banks interested in being on the Board. So, I think we 
still have a major problem. But I appreciate your willingness 
to make the sacrifice to serve. It is a very important 
position. It is hard to overstate the importance of the Federal 
Reserve, and the role it has come to play in American society.
    I congratulate you.
    I am going to run to a Medicare meeting, but you can 
certainly count on my support.
    Chairman Sarbanes. Senator Bennett.

             COMMENTS OF SENATOR ROBERT F. BENNETT

    Senator Bennett. I don't want my silence to be 
misinterpreted. I want to join everyone in extending my 
congratulations to you upon assuming this position.
    You will not recall it, but I remember when Senator Riegle, 
who was the first Chairman of this Committee under whom I 
served, announced his retirement. I went over to Senator Riegle 
on the Senate floor to wish him well in his retirement and he 
was talking to you, Mr. Chairman. He said to me, meet the new 
Chairman of the Senate Banking Committee. And at that time, I 
said, actually, my preference would be Al D'Amato.
    [Laughter.]
    And it now turns out I got both.
    [Laughter.]
    My congratulations to you and I am looking forward to 
working with you in the same spirit as the other Senators have 
commented.
    Chairman Sarbanes. Thank you very much. I appreciate that.
    Governor Ferguson, it is a standard procedure in this 
Committee to ask the nominees to take the oath with respect to 
their testimony. So if you would stand, I would like to 
administer it to you.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Ferguson. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Ferguson. I agree to that, yes, sir.
    Chairman Sarbanes. Thank you very much. We would be very 
pleased to hear your statement.

              STATEMENT OF ROGER W. FERGUSON, JR.

              OF MASSACHUSETTS, TO BE A MEMBER OF

                 THE BOARD OF GOVERNORS OF THE

                     FEDERAL RESERVE SYSTEM

    Mr. Ferguson. Thank you, Chairman Sarbanes.
    I would like to introduce my wife, Annette Nazareth, who 
has joined me here.
    Chairman Sarbanes. We are pleased to have you. We welcome 
her to the Committee.
    Mr. Ferguson. Thank you.
    Chairman Sarbanes, Senator Gramm, and Members of the 
Committee, I am pleased to appear before you today as President 
Bush's nominee to serve on the Board of Governors of the 
Federal Reserve System. I am honored that the President has 
nominated me to serve a full term as a Member of the Board.
    As a Governor, I am particularly mindful that the policy 
decisions of the Federal Reserve influence the economic well-
being of all Americans. It has been my privilege to serve our 
fellow citizens in this capacity since 1997, giving this role 
my undivided attention, and I hope to be able to continue in 
that service.
    During my tenure, we have faced a rapidly changing 
environment in many of our areas of responsibility, and I would 
like to review briefly some of those developments and our 
responses to them.
    Congress has given the Federal Reserve three monetary 
policy objectives: Maximum employment, stable prices, and 
moderate long-term interest rates. We have viewed these 
objectives as congruent with a goal of maximum sustainable 
growth, which can occur only in the context of long-run price 
stability. Fostering financial conditions in which Americans 
can realize the full productive potential of our economy has 
presented a number of challenges in recent years. The most 
important developments have been a step-up in the advance of 
technology--both in terms of the production of new goods and 
services and the more effective harnessing of past 
innovations--and a rapid accumulation of physical capital. 
These developments have made workers increasingly more 
productive. But faster productivity growth fed back on the 
demand for goods and services in ways that complicated the 
calibration of monetary policy. Faster growth in productivity 
and the reactions of businesses and households to this 
acceleration of productivity have combined with other forces--
particularly those associated with the growing 
interconnectedness of the global economy--to require 
substantial adjustments in the Federal Reserve's policy 
interest rate in recent years. But those adjustments in our 
policy instrument have been in the service of our objective of 
promoting maximum sustainable growth.
    Making monetary policy has been only part of the challenge. 
During my tenure at the Federal Reserve, we have also worked 
diligently to communicate to the public what we are doing with 
policy and why. Transparency in policymaking is a key part of 
the democratic process, as well as being helpful in fostering 
efficient decision making in the private sector. Becoming more 
transparent has been a goal of the central bank in recent 
years, keeping in mind that we must balance the need to be open 
and accountable with the need to maintain an effective process 
of decision making by the Federal Open Market Committee. 
Transparency requires that we periodically review our 
procedures, as we did in 1999, to ensure that they 
appropriately balance these considerations. I do not know what 
future changes, if any, might be called for in how we 
communicate, but I am confident that the Federal Reserve will 
continue to look for ways to communicate clearly our policies 
and our supporting rationales.
    While macroeconomic conditions are of overriding 
importance, the role of the Federal Reserve is broader than 
monetary policy. Financial stability is an essential 
precondition for maintaining a strong economy, and the Federal 
Reserve has important supervisory and regulatory 
responsibilities for our Nation's banking system. The Federal 
Reserve, and other regulators, must continue to foster a 
competitive environment that will benefit the users of 
financial services, while also promoting safety and soundness. 
I believe that we must achieve these goals with a minimum of 
regulatory burden and without leaving the impression that any 
institution is too big to fail. To minimize regulatory burden 
and achieve our other objectives, we should encourage what to 
my mind are the best regulators, namely, market discipline and 
management accountability. Of late, our challenge has been to 
meet these goals as we implement the financial modernization 
law. In my opinion, Congress wisely removed several antiquated 
barriers to a modern financial structure in the United States, 
and we now need to design regulatory and supervisory policies 
that reflect the will of Congress and deal effectively with a 
changing financial services industry.
    Technology and deregulation, forces for change that I have 
just mentioned, have encouraged consolidation in the financial 
sector. With central bank and treasury officials from 12 other 
major industrial economies, I have reviewed the likely effect 
of the global trend toward consolidation and its implication 
for central banks and regulators. Because financial systems 
will continue to consolidate, as the forces that motivate that 
evolution are unabated, the regulatory community needs to 
monitor developments closely. But our study also found that 
existing policies appear adequate to allow regulators to 
maintain safe and sound financial industries now and in the 
intermediate term and for monetary policy to work through many 
of the same mechanisms as in the past.
    More than the structure of the financial industry has 
changed of late. That sector has found uses for consumer 
information and created an array of financial products and 
services unimagined even a few years ago. These developments, 
in turn, raise some new concerns, and have re-ignited some 
existing ones, among consumers and legislators. Congress 
grappled with one of these issues, privacy, in the financial 
modernization law. Concerns about abusive lending practices 
have also reemerged of late. In all areas, but particularly in 
areas as sensitive as these, regulators should faithfully 
administer consumer protection laws as written. Any necessary 
regulations should adequately inform consumers and protect them 
against abusive practices while also not discouraging 
legitimate extensions of credit, especially to those who might 
previously have been denied access to such credit. Financial 
literacy will certainly play an important role in avoiding the 
growth of abusive or deceptive financial practices and in 
allowing consumers to protect their interests. I believe 
legislation, careful regulation, and education are all 
components of the response to these emerging consumer concerns. 
I also hope, however, that businesses recognize that it is in 
their long-term interest to maintain the confidence of 
consumers by avoiding deceptive and abusive practices and by 
respecting the privacy of their customers.
    Finally, our payment system affects every consumer and 
business. This system too has been, and will continue to be, 
changed greatly by emerging technologies. From the time of its 
very founding, the Federal Reserve has had the responsibility 
to foster an efficient, safe and accessible payment system. 
During much of 1998 and 1999, our primary objective in this 
regard was to help banks and other participants in the payment 
system maintain smooth operations as the century date change 
passed. Domestically, we achieved this goal by working directly 
with the banking sector. Internationally, I was privileged to 
work through multilateral groups to raise the awareness of the 
international regulatory community of the nature of the Y2K 
challenge. Now, we can take a longer-term perspective and 
consider how we might facilitate innovation in the payment 
system.
    As an overseer and as a regulator, the Federal Reserve 
needs to approach payment system innovations with an open mind 
and a willingness to adapt. In a dynamic economy, markets need 
to play a key role in guiding the development of 
infrastructure. This means that innovation and competition will 
be central to the future development of the payment system--as 
they are in other areas of the economy. Regulators should 
strive to remove barriers to innovations when we can do so 
without sacrificing important public policies. We should take 
every opportunity to foster competition and maintain the 
integrity of the payment system, but public policy should not 
be built on a single vision or prediction in the future. 
Consumers and businesses, as well as service providers will 
determine the range of payment services that best meet their 
needs.
    Mr. Chairman and Members of the Committee, during my years 
on the Board of Governors, I have done my best to contribute 
positively to all aspects of the Federal Reserve's many 
responsibilities. I look forward to the opportunity to continue 
to work with you and serve the Nation as a Member of the Board 
of Governors. Thank you for your attention and for considering 
my nomination. I would be pleased to respond to questions.
    Chairman Sarbanes. Thank you very much for your thoughtful 
statement. I think we will take 5 minute rounds and then we can 
do a second round if Members want to have further questioning.
    In the June 4 American Banker, former Federal Reserve Board 
Vice Chairman Alan Blinder was quoted saying: ``Everybody knows 
that there are institutions that are so large and interlinked 
with each other, that it is out of the question to let them 
fail.'' This statement contrasts with official Board policy and 
it contrasts with a statement you made recently before the 
Consumer Bankers Conference that: ``No institution is too big 
to fail.''
    I think this is a subject that probably needs further 
exploration. But I would like to get your perspective on it, 
just to sharpen it up, how the Board continues to adhere to 
this policy in light of its role in organizing a private-sector 
bail-out of the Long-Term Capital Management Hedge Fund in 
1998.
    There have been some proposals of ways to address the too 
big to fail issue, subordinated capital and so forth. Could you 
please address that?
    Mr. Ferguson. Certainly. I will address your question. It 
had many components. I will try to respond to each one.
    First, on the principle, the philosophical question of too 
big to fail, as I have said, and you quoted me correctly, I 
believe that there is no institution that is too big to fail. I 
think it is important to remind all participants in the 
financial system that any institution can fail in the sense of 
having management changed, in the sense of being forced to 
divest some of its activities or cease some activities. 
Clearly, there is a risk to shareholders of any institution and 
there is a risk to uninsured depositors and other creditors of 
any institution.
    I believe that this is an important message to continue to 
put out because, indeed, as you observed, there are even former 
officials who believe that other things are true.
    Now one of the questions I should address is the activities 
with respect to Long-Term Capital. I think, sir, that was a 
prime example of what the public would expect a central bank to 
do. In that case, the Federal Reserve Bank of New York, which 
has access to information about the markets broadly and many 
market participants, saw that one of the major participants in 
the markets, Long-Term Capital, was clearly starting to have 
financial difficulties.
    What the Federal Reserve Bank of New York did was to 
address their counter-parties, Long-Term Capital's counter-
parties, brought them all together, explained the situation as 
they saw it in the Federal Reserve in New York, and left it to 
the private sector to determine how they wanted to respond to 
those challenges. They did not suggest, either directly or 
indirectly, any sort of potential regulatory quid pro quo. 
There was no Government money at stake. The private-sector 
participants thought that it was in their interest to help do 
what ended up being an important activity, which was, frankly, 
a very smooth wind down of Long-Term Capital.
    So what we saw in that case, I believe, is an important 
lesson, which is, indeed, no institution is too big to fail. 
The management of Long-Term Capital and many of their 
shareholders lost money. The institutions positions were 
unwound, but unwound in a way that was not destabilizing to 
markets. There was no Federal Reserve quid pro quo of any sort 
express or implied.
    And so I think it is important to be quite clear about that 
case because it strikes me as a case where an institution was 
large and, in fact, did get wound down in an orderly fashion.
    I think it is also important to understand that there are a 
number of methods that are being used in the markets these 
days, or that are being discussed and encouraged or thought 
about, to try to minimize the moral hazard of this concept of 
too big to fail.
    You have touched on one that I think is very important, 
which is the question of greater transparency and disclosure.
    Through the Basel Capital Accord we also are considering 
more risk-based approaches to capital, to make the capital more 
risk-sensitive. And the Federal Reserve and other regulators 
have been working on risk-based supervision that allows us to 
focus much more on the risk-management capabilities of 
institutions in order to reduce the probability of any 
institution failing.
    I should finally end up by saying that, by definition, we 
know that in good times and in bad times, there may be 
institutions that are poorly managed. We are not a guarantor 
that no institution will ever fail. So these risk approaches 
that we are taking really are attempting to make the entire 
approach of this activity much more risk-based.
    But all of these things I think are in the context of no 
institution being too big to fail. There are institutions that 
are large and complex. Their winding down could be very 
disorderly and has to be managed carefully. But any institution 
could fail in the sense of management being changed, 
shareholders losing money, activities being contracted, 
activities being sold off to others, potentially the whole 
institution being sold to others, and uninsured depositors and 
creditors potentially facing some sort of haircut.
    Chairman Sarbanes. Thank you. This may be a subject that 
the Committee may want to pursue with the regulators, 
particularly in ways of building more mechanisms into the 
market structure to control this. But my time is expired.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Governor Ferguson, you made reference in your statement to 
the charge that the Congress has given to the Federal Reserve 
System, primarily that that comes out of the Humphrey-Hawkins 
Act--maximum employment, stable prices, and moderate long-term 
interest rates.
    When Senator Mack was a Member of this Committee, he and I 
joined in saying that the Fed should concentrate exclusively--
we indeed introduced legislation that would have repealed 
Humphrey-Hawkins--on stable prices. And if we got price 
stability in this country, the other things would follow, and 
having the Fed try to chase the unemployment numbers and try to 
solve unemployment problems with monetary policy was a nice 
dream out of the days when the Humphrey-Hawkins Act was passed. 
That practicality said you could not do it with monetary 
policy, and that if we got price stability, then moderate 
interest rates would be a natural by-product. So, we sponsored 
legislation to have you focus primarily on price stability.
    Now, Senator Mack is gone. I don't have quite the same zeal 
for that that he had, even though I still believe it, 
cosponsored his bill, and will still pump for it.
    But I would like you to respond to that and talk about the 
goals of Humphrey-Hawkins and if you have a sense of 
prioritizing, that price stability is more important than the 
others. In your personal view, or if you are going to say, no, 
I have to stick to the Humphrey-Hawkins Act regardless of how I 
may feel because that is what the Congress has said, just 
simply respond to what I am saying here and give me your views.
    Mr. Ferguson. I will give you my personal view. My personal 
view is that the various goals laid out in Humphrey-Hawkins can 
best be achieved if we do it in the context of long-run price 
stability. I want to be clear about that.
    I would be cautious about modifying the law in any way, 
however, because I do think that it is important for all 
central banks to recognize that another way to express their 
goal is the goal of what is called maximum sustainable growth. 
That can be achieved through long-term price stability, without 
question. But I think it is also quite important to recognize 
that there are costs to an economy going above potential and 
there are costs to an economy going too far below potential.
    I think the way we best serve the economy and best serve 
our fellow citizens is by using our instrument to do the best 
we can to match aggregate demand and aggregate supply and 
create conditions that foster maximum sustainable growth, I 
want to be mindful of the cost on both sides of maximum 
sustainable growth.
    In that sense, I am quite comfortable with the goals laid 
out in the Humphrey-Hawkins law. I am quite comfortable with 
our ability to keep our eye on the ball in terms of the 
underlying strength or importance of long-run price stability.
    But I think it is also important to recognize that the 
other way of saying this is this concept of maximum sustainable 
growth and there are costs either above or below.
    And I don't want to lose track of the costs that come from 
either growth that is above, and therefore, risks inflation, or 
growth that is below potential, and therefore risks the obvious 
costs that emerge in the economy when resources are 
underutilized.
    Senator Bennett. Thank you. We are not as far apart as some 
might want to make us.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Senator Bennett.
    Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman.
    Governor Ferguson, Chairman Greenspan said before the 
Budget Committee in January that the outlook for budget 
surpluses rests fundamentally on expectations of long-term 
trends in productivity. I think that gets at that concept of 
maximum sustainable growth that is built into those 
formulations.
    At that point in time, we were looking at 2.5, 2.7 percent 
kinds of growth numbers. We have had actually, shockingly, 
negative numbers in the first quarter of 2001. It is hard to 
identify trends off of one quarter, but a lot of our 
assumptions that are built into budget surplus projections are 
dramatically impacted by small changes in these numbers, let 
alone dramatic changes that might be 3 or 4 percent, if those 
were to be sustained. Hopefully not.
    Given your background, particularly with regard to 
technology and understanding of how that has impacted 
productivity growth, do you have comments or could we ask for 
your comments with regard to that, and particularly its 
implications for budget surpluses.
    Mr. Ferguson. I will comment on both the short-run and the 
longer-term perspective.
    In the context of an economy that is growing as far below 
potential as ours currently is, it would not be surprising, and 
was not surprising, to see that the productivity number was 
negative in the first quarter.
    To answer your broader question, I believe there are new 
things in the way of technology that will allow potential 
growth to return in the long run.
    I think that I would put myself in the camp of being 
cautiously optimistic that we have not seen the end of the 
increases in productivity that we have experienced and 
benefited from.
    As I talk to technologists in the world of semiconductors, 
for example, they point out that there is now technical 
capability to build larger chips. There is technical capability 
to etch in smaller lines--again, this is largely technical 
talk. We are at about 0.25 microns and there is room to make 
them even smaller. There is obviously a limit.
    They think that will allow for potentially 30 percent 
reductions in the price of semiconductors. Given the fact that 
semiconductors are in many ways the building blocks of this 
high-tech revolution, recognizing that potential increase in 
the capability of semiconductors is important.
    All of this is summarized in the shorthand called ``Moore's 
Law'' or ``Moore's Curve.'' And what I hear basically is that 
the semiconductor manufacturers still believe that Moore's Law 
is in effect and they will continue to see increasing 
capabilities and decreasing prices in the world of 
semiconductors, which should drive some ongoing productivity.
    The second part of this, however, is that it is not 
sufficient to have the technical capability. You need 
businesses to adopt these technologies.
    My understanding from talking to businesses is that they 
believe there is still more to do in terms of becoming more 
productive. Some would argue that some of the low-hanging fruit 
has already been captured, if you will. But they are quick to 
say that they thought that a few years ago as well.
    This productivity increase that we have benefited from, 
though we are in a bit of a pause now, I am cautiously 
optimistic will return and we will continue to see very solid 
productivity numbers.
    I should also tell you, by the way, that if one looks at 
the productivity numbers, from quarter to quarter, they move 
around quite a bit. So it is not going to be a smooth trend. It 
never has been.
    I think what that might imply in terms of the long-run is I 
can imagine a potential growth in the economy that is still in 
the range of around 3\1/2\ percent, maybe a bit more, maybe a 
bit less, but in that range.
    Now, you have talked about----
    Senator Corzine. Maximum sustainable growth.
    Mr. Ferguson. Maximum sustainable growth. You have talked, 
however, about issues of long-term forecasts and other things.
    Obviously, economists have been surprised, as others have, 
with respect to the ups and downs of the economy. I think if 
one looks at any of the forecasts from just a few years ago, 
you would find that they were far off. There is always some 
danger that these forecasts will again miss. I am always very 
cautious about a long-term forecast, even though I would 
describe myself as cautiously optimistic about the potential of 
the U.S. economy in the long run.
    Senator Corzine. What would be an early warning sign that 
you would be looking for that these productivity numbers were 
not going to achieve the kinds of growth targets that would be 
built into the kind of projections we have, again, tying it 
back to the projected budget surpluses, its impact being such 
an important driver of those.
    Mr. Ferguson. Economists at the Fed and also in the private 
sector who have looked at the drivers of this productivity 
increase have pointed to two things.
    One is just simply an increase in the productivity in the 
high-tech sector. The other is a concept called capital 
deepening, which is to say more capital per worker, which shows 
up in both equipment and software expenditures and what is 
called business-fixed investment.
    Their third component is, in all honesty, what is called a 
residual multifactor productivity, which is the use of 
technology working together with individuals and changing 
manufacturing approaches.
    Another thing that I would look for in terms of this 
question of are we likely to continue to have a positive trend 
with respect to productivity increases, is the question of do 
we continue to see businesses investing in equipment and 
software? Do we continue to see what is called capital 
deepening?
    If it turns out over the long term that this slows down, 
then that I think would be a sign that perhaps productivity is 
not continuing to increase and that some of the forecasts for 
the long run may not come true. And so, there are really 
fundamental business activities that one can look at.
    The other one obviously is the question of whether or not 
these comments that I made earlier about what I hear from the 
semiconductor industry turns out to be true.
    If they cannot continue to stay on Moore's Law and, indeed, 
we don't get productivity increases in the manufacturing of 
high-tech equipment itself, then that is a second element.
    The third element, frankly, would be whether or not 
businesses continue to restructure to take advantage of some of 
these new technologies.
    There are at least two or three things that I would look at 
and many of them are what I would describe as the microeconomic 
underpinnings of the macroeconomic forces that we have dealt 
with thus far.
    Senator Corzine. Thank you.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Bunning.
    Senator Bunning. Thank you.
    Governor Ferguson, hindsight being 20/20, do you think that 
the Fed waited too long to reduce the targeted Fed fund rate?
    Mr. Ferguson. No, sir. Even with 20/20 hindsight, I do not 
believe that to be the case. With the information we had at 
hand, we obviously, during the course of 2000, stopped and 
waited to see how the economy was evolving. We saw in the late 
fall, in particular, and going into the December meeting, that 
the economy was indeed slowing.
    There was a legitimate question as to whether or not this 
was simply a very shallow slowing that was going to pick up 
quickly or was it something more serious?
    We were quite clear as we came out of the December meeting 
that we would be monitoring the incoming data very closely 
because there was a question as to exactly what this slowing 
was that we were looking at, and how severe it was going to be.
    The data became clearer, post the December FOMC meeting. 
Anecdotal data, the purchasing managers report, and some other 
hard data came in. We returned and moved fairly aggressively on 
January 3. And we have continued. We have had four other 
aggressive moves and we have lowered our Federal funds target 
rate by 250 basis points.
    Even with hindsight, knowing what I knew, knowing the 
information was on the table, I would say we still did the 
right thing.
    You should be mindful, as I know you are, that there are a 
number of forces that led to this sharp reduction and they 
surprised almost all economic observers.
    Even in January of this year, the consensus forecasts, the 
so-called Blue Chip, was for growth this year of 2.7 percent. 
This was in January, once we had recognized that the slowing 
was perhaps a little deeper than others had expected.
    So a number of forces came to play and many observers were 
surprised by the depth of the slowing that was experienced.
    Senator Bunning. I think we are pretty much familiar with 
that. Some of us strongly disagree with you about the Fed and 
the reaction to the Fed's lowering in direct relation to the 
Fed's tightening. But that is neither here nor there. You have 
given me the answer I wanted.
    Do you believe that the Fed's forecasting models are up-to-
date, or do you think that they need more work?
    Mr. Ferguson. I believe with all models that there is 
always room for improvement, by definition. I think we have 
some of the best models in the country for sure, and our 
forecasting record has been as good as others'.
    I will also say that it is important to supplement the 
model-based forecasts with a variety of other data. Anecdotal 
information is important. That is one of the reasons, for 
example, to have the Federal Reserve Bank Presidents come and 
act as voting members, some of them, on the FOMC, because they 
bring very good real-time anecdotal information. We also look 
at surveys that come from a number of private-sector sources.
    Personally, as I travel around, I am eager to hear from 
bankers, from industrialists, from farmers. I was just in 
Illinois recently talking to some farmers about how conditions 
look.
    I think it is important to say that it is good to have a 
model. A model has rigor. It has some scientific basis to it. 
But models are built on past regularities and you need to 
update them periodically. And I think we need to supplement 
them, as we do, with anecdotal information and real-time 
information.
    I will also say that, particularly now, there are a number 
of individuals who have come and said, ``Well, this particular 
piece of data would have given you a better sense of what was 
going on.'' My perspective is always, tell me the data that one 
has seen. Let's put it into a broader context to see if it is 
really a good predictor over a long period of time or happens 
to get it right this one time.
    Senator Bunning. I only have one more minute.
    Mr. Ferguson. Yes.
    Senator Bunning. I have a bunch of questions, but I want to 
make sure that I get this one in.
    Mr. Ferguson. Fine.
    Senator Bunning. Do you believe that the Fed should look at 
the stock market when deciding monetary policy, either as an 
indicator of an inflationary wealth effect or as an indicator 
that the economy may be heading south?
    Mr. Ferguson. My view on the stock market is, as you know, 
because I have said it publicly and said it to you, that we 
should not target the stock market. However, I do believe that 
the stock market is an important element in creating aggregate 
demand in the U.S. economy and therefore we should be mindful 
of what is happening in the stock market.
    The stock market creates wealth for individuals, which can 
translate into consumption over a 2 to 3 year period. It also 
for a number of businesses is a source of capital. And so, we 
should be mindful of what is occurring in the stock market, as 
we are with a number of indicators that indicate what might be 
happening to aggregate demand. But we should not target it.
    Senator Bunning. Do you believe the Fed monetary policy 
should react to market gains or losses?
    Mr. Ferguson. I will repeat the answer I just gave, which 
is we should be mindful of what is happening in the stock 
market because it is a source of wealth.
    Senator Bunning. Should the wealth effect or the reverse of 
the wealth effect, which was front page in The Wall Street 
Journal not too long ago, not effect Fed policy?
    Mr. Ferguson. What I have said, sir, is that we should be 
mindful of what is happening in the stock market because, in 
fact, it does create wealth and wealth can translate into 
consumption.
    This has been an economic regularity that has been picked 
up in econometric models. And I still believe that there is 
evidence that there is a wealth effect. Obviously, it is 
controversial. I sense that you may not agree with us on this. 
But most economists would say that there is a wealth effect. 
The numbers around the wealth effect some put in the range of 3 
to 5, 3 to 6, 2 to 6 percent of incremental wealth is 
eventually consumed. So, in that sense, we should be aware of 
what is happening in the market because it does play into 
aggregate demand.
    You have heard us talk about both the positive wealth 
effect and also a negative wealth effect, a concern that 
consumers may gradually pull back on consumption because wealth 
has, in fact, been destroyed by events in the stock market. And 
so, I think we should be mindful of what is happening in the 
market because it plays through to consumption, to the cost of 
capital, and eventually, to aggregate demand.
    Senator Bunning. Thank you.
    Chairman Sarbanes. Thank you, Senator Bunning.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman.
    First, let me congratulate you, Mr. Chairman, on your 
sitting in this Chair, not for the first time. The 17 days you 
were Chairman you handled the Chairmanship with intelligence, 
clarity, and grace--your usual attributes. I know that you will 
continue to do it. It is great to have you there.
    Chairman Sarbanes. Thank you.
    Senator Schumer. I would also like to thank Vice Chairman 
Ferguson for his service at the Fed. I know both he and his 
wife are exemplary public servants. You are a Washington 
financial power couple--financial power public service couple.
    That is what I want to say.
    You have both done a great job. Our country needs people to 
go into public service. Not enough highly qualified people do 
these days. And the fact that you are here I think is good news 
for our country.
    I have a bunch of questions on productivity, but I know my 
colleague from New Jersey has touched on those and we discussed 
those privately yesterday, although I am troubled by the 
decline in the productivity number, let the record show that 
the Vice Chair believes that there is still plenty of oomph 
left for productivity.
    I know the Chairman has the same view because I have talked 
to him about that.
    I would like to ask about consumer confidence.
    With the increase in layoffs we see almost weekly, with the 
fact that the economy seems to have slowed down, with the 
decline in productivity which eventually does have an effect, 
even if it is short-term, but mainly with the layoffs, it seems 
to me that consumer confidence is at a pretty good level, 
considering everything that is swirling around and is probably 
the linchpin of the economy right now, preventing it from going 
further down.
    What is your view as to how important consumer confidence 
is at this juncture in time and where do you think that it 
might be headed, given the fact that over the last quarter I 
think we have seen more layoffs than we did in previous 
quarters? How much of an effect do the layoffs have on consumer 
confidence?
    Mr. Ferguson. I believe the following. We are in a period 
where the economy is, indeed, growing quite slowly. As the FOMC 
said, and I believe is still the case, the risks are, as we say 
in central banking language, the risks are to the downside 
around this slow growth period.
    One of the reasons that I am quite mindful of the downside 
risks to the economy is the point that you just made, Senator 
Schumer. At this stage, consumption has held up reasonably 
well. Even the most recent numbers suggest that. However, there 
is a risk that, as you indicate, with what I describe as a drum 
beat of layoff announcements and unemployment gradually rising, 
that consumers may decide that they want to pull in their horns 
a bit. And given the fact that much of the forward momentum in 
the economy is coming from consumption expenditures, that is a 
source of the downside risk. I think you are right to point to 
this.
    I would say that many people have recognized that there has 
been a bit of a disconnect between consumer confidence figures 
as measured through surveys, which have been going down during 
the course of the year and have stabilized a bit now. Who knows 
what the next survey will be? There has been a slight 
disconnect with consumer spending behavior, which has held up 
reasonably well.
    At some point perhaps those two things will come into 
closer alignment and it is one of the things that we must 
monitor closely as we think about the state of aggregate 
demand.
    But your concern with respect to consumers, consumer 
confidence and consumer spending is one of the things that 
underpins the statement that I have made and others that the 
economy is growing slowly and the risks in that slow growth are 
primarily to the downside.
    Senator Schumer. Have there been times in recent economic 
history, where layoffs and unemployment did not affect consumer 
confidence and consumer spending? Or is there a pretty direct 
link in the past? Given your comment to Senator Bunning on 
models, what do you think it bodes for the future? Do you think 
that we can use the past as a predictor of the future on this 
issue?
    Mr. Ferguson. One of the things that we note and, again, 
back to the econometrics, there are some elements of the 
consumer confidence survey that do have what we describe as a 
little bit of information content in them. One of those is the 
element concerning expected employment going forward. That has 
actually ended up being, not a heavy predictor at all, but 
having some information content with respect to future 
consumption behavior.
    History has generally shown that, as unemployment goes up, 
consumers tend to pull in their horns. And so, we do have to 
again be mindful that there are some risks to the downside here 
and I think we have been clear to the public about that, and 
you have obviously picked up on that concern.
    Senator Schumer. Thank you, Mr. Vice Chairman.
    Thank you, Mr. Chairman.
    Mr. Ferguson. Thank you.
    Senator Sarbanes. I have an issue I want to take up with 
the Governor that will probably take longer than the 5 minutes. 
But I will defer my round and recognize my colleagues and then 
pick up after the second round on this matter I have to 
discuss.
    Senator Corzine.
    Senator Corzine. Mr. Vice Chairman, I have two questions I 
would love to hear your observations on.
    We have seen almost an unprecedented rapid decline in 
short-term rates. Five 50-basis point moves in 4 or 5 months is 
relatively unprecedented. But we have not seen the impact in 
long-term rates that we have obviously seen in short-term rates 
and in fact, they have risen. We have a sharp upward rise in 
yield curve. I would love to hear your views on what 
information one might derive from that. And I will just get the 
other question out and you can think about how you might want 
to deal with that.
    We just recently passed a tax cut which has immediate 
stimulus in it in the current fiscal year and in subsequent 
years.
    I wonder if the Fed has had an opportunity to check out 
what kind of thrust those immediate impacts and efforts on 
rebates and changes in rates will have with regard to the 
overall growth in the economy.
    Mr. Ferguson. Okay. Let me first address your question on 
long-term rates.
    You are right to recognize that as the short-term rate has 
been coming down, more recently the long-term rate has gone up. 
In the beginning part of the year, it indeed was coming down 
and now it has started to go up.
    The question of information content I think is an important 
one.
    The longer-term rates could be reflecting two or three 
different things. First, particularly in the corporate sector, 
it may reflect some optimism or expectation that the future 
will turn out to be relatively attractive for businesses. The 
economy will start to grow again, getting back to potential 
relatively quickly. So some think that the information content 
is a positive one, that the economy may have reached bottom and 
may be shortly turning.
    There are others who think that----
    Senator Corzine. In contrast to what your weight of 
evidence would be with respect to how you are reading the 
economy.
    Mr. Ferguson. Well, as I said, I expect a period of some 
weakness. I have not been very explicit about how long. But 
certainly, you are right. This sense of turnaround that might 
be coming from the long-term rates is slightly different from 
my sense that we have not yet reached bottom, or are too early 
to declare that we have reached bottom.
    The second piece of information content that some have 
taken out of these long-term rates is a concern that inflation 
may pick up in the intermediate term.
    On this one I think there is information from surveys that 
suggests that inflation expectations are relatively well 
contained. They may have crept up just a little bit.
    I think it is important, as I said to another question, 
that we not leave an impression that we don't have an eye on 
the price stability issues, even as we talk about weakness in 
the economy.
    The third element of this, I should say, is that this has 
been a period in which businesses, particularly investment-
grade businesses, have been issuing bonds at a relatively large 
pace. In May, there were over $650 billion of bonds issued at 
an annual rate. You have supply and demand considerations going 
into these rates as well. So, you have two or three different 
activities that are being signaled through the rates.
    As I have said, it will be interesting to see if the 
turnaround is as the bond market seems to be expecting. It will 
be important for us to continue to have one eye on inflation in 
case that should start to become a problem. I do not currently 
expect it given the weakness in the economy. But one should 
never be complacent about it. And then you have these basic 
supply and demand concerns.
    As to your question about the tax cut, knowing that I was 
coming here, I actually talked to our staff this morning. They 
have not yet developed a full perspective on this. But 
obviously, I want to give you a responsive answer.
    I think the question of how much stimulus is going to 
emerge from this tax cut is open to a simple, but unanswerable 
at this stage, question of how consumers view it and respond to 
it. Economic history has shown that if you have a tax rebate 
that is perceived to be short-term, then consumers spend 
somewhere around 30, 40, maybe 50 percent of that, but spend it 
relatively quickly.
    On the other hand, if it is perceived to be just the front 
edge of a longer-term tax cut, not just simply a one-time 
rebate, then what economists describe as a marginal propensity 
to consume out of that is much higher, eventually hitting 
something close to 100 percent, but starting probably around 70 
percent or so.
    The question of how this plays through depends first on how 
consumers perceive it and how much of this rebate they spend 
early versus holding onto.
    The second question is, once we see what is called PCE, 
personal consumption expenditure, the question then becomes, 
are the goods that the consumers purchase going to be ones that 
are coming out of inventory or are they going to come from new 
production or is it going to come from imports?
    Because each of those three different things have a 
different impact on GDP as we measure it in the United States.
    Now having said that, I did look to see, since I know our 
staff is still working on it, what the private sector 
forecasters are saying. And there is a range of views. There 
are some who are saying that much of this will be spent and 
that it will go, this personal consumption expenditure will go 
directly to GDP, not come out of inventory, not come out of 
increased imports.
    I saw one forecasting house that said they expect the 
marginal increase or the marginal impact of this to be about 6/
10ths of 1 percent of GDP in the fourth quarter. I have seen 
others that have used numbers that are slightly smaller.
    You should be aware that this will be stimulative. The 
exact magnitude is something that is still being discussed in 
the economics profession. But it depends on how consumers 
respond to it, in terms of how much of it they spend, and 
whether that spending ultimately comes out of inventory, new 
production, or imports.
    Senator Corzine. Ultimately, will the Federal Reserve 
models reflect what your perspectives are?
    Mr. Ferguson. I think, ultimately, what will happen is that 
the model will have the relationships built in and then there 
will have to be a judgmental adjustment based on other 
information that comes in. So the model will give a baseline 
answer, but it will probably need to be adjusted somewhat.
    Chairman Sarbanes. Thank you, Senator Corzine.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    In April of this year, you delivered a speech on the 
subject of transparencies in central banking in which you 
detailed recent trends in this area. What future trends do you 
envision in this area, since you have a 14 year term? Don't go 
out that long.
    Mr. Ferguson. It is hard to go out that long. What I said--
--
    Senator Bunning. Just give me a general, short-term.
    Mr. Ferguson. This is an area that I have spent a fair 
amount of time on. I am glad you raised the question.
    What I said in that speech was that it is unclear exactly 
what changes are next, and I truly meant that. But I also said 
that the Federal Reserve, I think, will continue to look for 
ways to make clear to the public and to the markets what our 
rationale was and what our perspective is going forward.
    The reason I say it is unclear is literally, I am not sure, 
having spent much of 1999 working with my colleagues to find a 
consensus and having built that, I personally want to see how 
this works.
    I also think that it is an important part of our 
accountability that we can communicate to you and others what 
it is that we are doing and it is important for us to think 
about newer and different approaches to doing this.
    We have obviously put out statements. We have adjusted them 
to reflect what we call the balance of risks. We are using the 
Internet as a great way to communicate and become more 
transparent. We will continue to come and respond to questions 
here.
    But I don't know exactly what is next. I will simply commit 
to you that during my 14 years on the Board, I will continue to 
be a strong voice for transparency because I think it is part 
of what we should do in a democracy and it is an important way 
that we can help the markets and others understand what we are 
doing.
    I will also say, however, that there is always a balancing 
in this world of transparency. You want to be as transparent as 
you conceivably can be without being destabilizing in any way 
and without undermining the ability of the FOMC to reach good 
decisions and to have a good and open discussion.
    And so, as I go forward with a personal commitment to 
continue to focus on transparency, I am mindful that there will 
be a balancing that must go on because there are issues on both 
sides that have to be looked after.
    Senator Bunning. Obviously, the Fed's job is looking to see 
if there is inflation-- current, immediate, present, and 
future. That is one of the main tasks you have as far as 
monetary policy. And I ask Chairman Greenspan this question 
every time he comes here and I am going to ask it to you. Do 
you see any short-term, intermediate inflation anywhere in the 
current economy?
    Mr. Ferguson. The most recent statistics over the last 
several months, some of the measures, the CPI, for example, 
have shown a little bit of an uptick in inflation. Other 
measures have not shown that kind of uptick in inflation.
    I think much of what we saw in the CPI reflected a pass-
through from oil prices, for example. Some of it reflected 
perhaps that the economy as we know was indeed during 1999 and 
2000 growing above potential. And so some of that may have been 
a spill-over from a period when the economy was growing above 
potential.
    Going forward, as I answered to Senator Corzine, some think 
that the markets are signaling a potential pick-up in inflation 
sometime out in the future.
    My perspective is that, in the context of an economy that 
is growing below potential, and in which resource utilization 
is likely to ease, and pressures in resource markets are likely 
to ease, I do not think that inflation is likely to be the 
short- to intermediate-term challenge that we have to deal 
with. However, as I have already said, this is all in the 
context of an unchanged, long-term mission as you point out, to 
maintain long-term price stability.
    So an expectation that inflation will be well contained for 
the short- to intermediate-term because the economy is growing 
below potential and resource utilization is easing, should not 
be taken as any sense of complacency.
    Senator Bunning. Well, I look forward to seeing Fed policy 
and the transparency of Fed policy in the immediate future, not 
only in your June meeting, but also in your meetings that come 
after the June meeting.
    Thank you.
    Mr. Ferguson. Thank you.
    Chairman Sarbanes. Thank you very much, Senator Bunning.
    In view of some of the questions, I would just like to note 
that the charge that has been given to the Fed by Congress, and 
the Fed after all is a creation of the Congress, and I quote:

    As the Board of Governors of the Federal Reserve System and 
the Federal Open Market Committee shall maintain long-run 
growth of monetary and credit aggregates commensurate with the 
economy's long-run potential, to increase production so as to 
promote effectively the goals of maximum employment, stable 
prices, and moderate long-term interest rates.

    I think you have reflected an awareness of the statutory 
framework in which you are operating in your testimony here 
today.
    I also should note, when Humphrey-Hawkins was passed and 
they had a 4 percent unemployment goal, everyone said it could 
never be achieved. It was just pie in the sky. The fact of the 
matter is that we did achieve it. The Fed in the overall--I 
mean, you had some dissonant voices--rejected the notion that 
there was a higher level of unemployment, that if you went 
below it, you would automatically get inflation. The Fed kept 
testing that and we are now at 4\1/2\ percent unemployment 
without a significant inflationary problem. That is not to say 
we don't remain on alert or cautious. But I do think it is an 
interesting commentary about recent economic history.
    Now the issue I wanted to discuss with you is that 
yesterday I received a letter from eight members of the House 
of Representatives. Copies were sent to all of my colleagues. 
The letter was sent by members of the Congressional Black 
Caucus and the Hispanic Caucus. In that letter--well, let me 
quote parts of it because they are raising the question of 
diversity in the Federal Reserve System. They say:

    The only statistics available indicate that although 
minorities and women have increased their presence in the 
lower-paying administrative positions, they continue to be 
underrepresented in the professional and technical job groups.

    Further on they say:

    The lack of information outlining the Federal Reserve's 
efforts to diversify its staff for ``pipeline'' positions that 
could develop into the senior officer level jobs is of great 
concern. It is particularly disturbing when considered in light 
of recent allegations by several Board employees regarding a 
hostile work environment, and intentional discrimination in the 
hiring and promotion of minorities at the Federal Reserve. If 
there is any truth to any of these allegations, we want to send 
a very clear message that this behavior is unlawful, 
unacceptable, and that it must end immediately.

    Now to their credit, these members of the House went on to 
say:

    We would like to give Vice Chairman Ferguson the 
opportunity to address and correct these issues in the future. 
We have provided several questions that we would like you to 
raise during the confirmation hearing. Because our goal is 
simply to have these issues addressed, you are welcome to share 
these questions with Vice Chairman Ferguson in advance. We are 
excited to work with you on this matter and hope to rely on the 
Vice Chairman to tackle the issue of diversity at the Federal 
Reserve.

    We thought this letter was of sufficient import that we 
sent it down to you as soon as we received it. I think what I 
would like to do is get a response from you now on the issue 
and generally.
    The specific questions they submitted, I think you should 
have an opportunity to submit a response in writing to the 
Committee after you and the others at the Fed have had a chance 
to address them and prepare well-considered answers because I 
assume it will require some survey of what your situation is. 
Could you respond to the points made in the letter--describe 
the Fed's efforts to improve diversity?
    Mr. Ferguson. While I was not expecting the letter, I am 
pleased to respond to it because it is an issue that I take 
extremely seriously.
    First, let's put a few facts on the table.
    In the time that I have been at the Board since 1997, we 
have, through turn-over, retirement, et cetera, appointed 10 
division and office directors. These are our highest staff 
positions. Half of those people have been women. There has been 
one African-American and one Hispanic.
    We have appointed 38 new officers during my time at the 
Board. Nineteen have been female, 19 have been male. Six of 
those 38 appointments have been minorities.
    I am extremely aware of this issue. As the Administrative 
Governor, one of the things I have done is put into every 
manager's four management objectives--one of those objectives 
is with respect to EEO. And I will just read very briefly. ``It 
is to demonstrate and promote equal employment opportunity and 
compliance with Federal laws, and Board policies pertaining to 
recruitment, development and promotion.''
    So each of our managers is going to be evaluated in part on 
how well they have done with respect to meeting the laws and 
Board policy because Board policy is congruent with the law and 
the world of equal employment opportunities.
    I meet with each of our division directors every 6 months 
to determine how well they are doing against these objectives 
and to give them my personal sense that this is extremely 
important to me and to the Board.
    I would also point out quite clearly that we have diversity 
training and EEO training. That is mandatory for all Board 
staff.
    I have asked the Board--and this predates this letter by 
many months--to review all the policies and procedures that we 
have and find out if we are at the upper end of what we can and 
should be doing. I am asking them to compare what we do to what 
is being done in the private sector. And if there is anything 
that the private sector is doing, or the Government agencies 
are doing, that we are not, I want to know about it.
    In the world of recruiting, we are participating in and 
recruit from a number of minority organizations--such as the 
National Society of Hispanic Engineers, Hispanic MBA's, and the 
National Black MBA Association.
    We have worked hard. I personally and others have worked 
hard to raise in the minority community awareness of what the 
Federal Reserve has done. I have met personally with the MBA 
students and the Ph.D. candidates in economics at Howard 
University here in Washington.
    I have accepted an invitation--again, months ago--to go to 
Florida A&M University in Tallahassee, one of the leading 
historical black colleges, to teach a class and to speak very 
clearly about what we are doing.
    So no one should have any doubt about my personal 
commitment and the Federal Reserve's commitment to comply with 
the laws and to create a workplace in which everyone is 
expected to and able to contribute their fullest.
    I would like to see as much diversity as we can consistent 
with maintaining the obviously high standards that we already 
have, and I have myself been heavily involved in this, and I 
think I am representing, broadly speaking, the interest of the 
Board and the desires of the Board.
    I will be working with the staff to respond to the specific 
questions. But I am pleased to be on the record here so that 
there is no question in anyone's mind of my personal 
commitment, or the Board's commitment, in this area of 
diversity and EEO.
    One other point I would make because I know this from 
personal experience. In many of the areas in which we recruit, 
particularly among Ph.D. economists, the representation of 
minorities is relatively low, disproportionately low.
    We are competing for this small pool with private-sector 
firms. We think that we have many things to offer in terms of 
impact on policy, interaction with other high-caliber 
economists, and an important public policy role, and I want the 
Fed to attract as many people as we possibly can. But we should 
be mindful that for all of the efforts that we put in, we still 
are dealing with a relatively small pool. This is, I think, an 
important, long-term commitment with respect to the Board.
    Chairman Sarbanes. The Federal Reserve Board, as I 
understand it, monitors and evaluates the reserve bank's 
affirmative action plans and EEO goals. Is that correct?
    Mr. Ferguson. Yes.
    Chairman Sarbanes. Now is that part of your mandate?
    Mr. Ferguson. It is part of our general oversight role, 
yes.
    Chairman Sarbanes. What is your view of what is happening 
in the 12 reserve banks on this issue?
    Mr. Ferguson. My view is that, with any 12 organizations, 
there are areas of strength and areas where we have to continue 
to work.
    I don't doubt the commitment of any of these institutions. 
Many of them have engaged in various outreach efforts similar 
to ones that I have identified. Some of them, because of where 
they are located, are finding that their pool is not as broad 
and rich as one would like. But they are being relatively 
creative in this area.
    Again, as I said, in other areas, this is not a place in 
which we can be complacent, though, and we have to continue to 
watch and make sure we are doing the best that we can.
    Chairman Sarbanes. Of course, as the monitoring agent, it 
is very important for the Board itself to establish a standard 
and set practices that can be pointed to in terms of being 
emulated. This effort within the Board to address its own 
practices is extremely important. Then I would hope that it 
could be carried out into the 12 reserve banks across the 
country.
    I think this is a matter of consequence. The members who 
wrote to us cited a report that was issued by Chairman Gonzalez 
of the House Committee in the early 1990's, about 8 years ago, 
that found this underrepresentation and urged that it be 
closely monitored, and various measures in order to try to 
improve it.
    In fact, the Chairman himself at the time, Chairman 
Greenspan, was not satisfied with the progress that has been 
made. And then on occasion, he has cited improvements in the 
policy.
    I think the concern now is that there has been improvement 
at the lower levels, but whether it carries through--of course, 
you are responsible and the divisional heads goes right to that 
point.
    Mr. Ferguson. Not just the divisional heads, Mr. Chairman, 
but also the officers.
    Chairman Sarbanes. Yes.
    Mr. Ferguson. Those are the leading staff members.
    Chairman Sarbanes. Well, if you could take the various 
detailed questions they attached to their letter that we 
forwarded to you and give us a response for the record, we will 
include their letter in the record and your response to it.
    Obviously, this is a matter that we will continue to pay 
attention to in the future. It is important. I am pleased to 
hear of your own strong commitment to it. And the members who 
wrote it, as I said before, in their letter said: ``We hope to 
rely on the Vice Chairman to tackle the issue of diversity at 
the Federal Reserve.''
    I don't think you should come away from this hearing 
without some charge, and we would be happy to give you this 
one.
    Mr. Ferguson. As I have tried to indicate, it is a charge 
that I have already taken up, and I will continue to work in 
this area.
    Chairman Sarbanes. Now, I wanted to just ask a couple of 
other quick questions.
    There are academic and trade publications that have 
suggested that substantially reducing the number of checks 
written in the country would result in substantial cost 
savings. The Federal Government now requires most of its 
payments to be made electronically. What is the Fed's view 
about steps that might encourage a more efficient payment 
system?
    And in the course of perhaps moving toward increased 
electronic transactions, what impact would that have on small 
community banks? Would they be able to acquire and officially 
use any new technology? Where is the Fed on this issue?
    Mr. Ferguson. As you mentioned, I Co-Chair one of the 
committees, an ad hoc committee that looks at the future with 
respect to payment systems. I agree that there would be some 
benefit to moving from a heavily check-based, paper-intensive 
system to a more electronic system. About 70 percent of our 
noncash payments now are done with check. That has come down 
from about 80 percent 10 years ago or so.
    As I said, there would be some savings. Fed staff has 
estimated over the last 10 years that some numbers show 1 
percent of GDP, some numbers show 2 to 3 percent of GDP being 
spent, as a societal cost, with respect to the check payment 
operations.
    Certainly, there are a couple of things that we can do and 
we have done.
    First, we have to make sure that our regulations do not 
stand in the way of experimentation in the world of electronic 
payments. And we recently have issued, for example, staff 
commentary to Regulation E, which implements the Electronic 
Funds Transfer Act, to help businesses understand what can and 
cannot be done under the EFT Act.
    To answer your question with respect to small businesses--
small banks in particular--they will be capable of continuing 
to participate in the payment system even as it becomes more 
electronic.
    Most EFT networks--the vast majority of them--have very 
open rules that allow a lot of members and nonmembers to fully 
participate. There are also service bureaus that are 
specialized in working with smaller institutions to help them 
build the kind of technical capabilities that are required in 
this world of electronics.
    I think, ultimately, the biggest challenge about moving 
from a paper-based system to an electronic system has very much 
to do with helping consumers to understand that many of the 
benefits that they get out of a paper-based system, they could 
expect in an electronic system, and some of the concerns they 
have with respect to electronics I think can be overcome.
    Whether we move from paper to electronics will depend not 
so much on regulators and what we do, although there are some 
things we can do. It will depend very much on the private 
sector and market acceptance in the private sector.
    Chairman Sarbanes. Well, as we move in this direction, I am 
encouraged to hear that you are sensitive to this concern about 
the small community banks and making sure that they still find 
a place within the system and it is not structured 
disadvantageously to them.
    Actually, your final comment brings up the last question I 
want to ask, and that goes back to this issue of financial 
literacy and education, which you touched upon in your 
statement and which Chairman Greenspan has spoken about on a 
number of occasions.
    Senator Corzine has left, but this is an issue that he has 
raised and I think it is a very important issue and it is one 
that we intend to hold some hearings on later in the year to 
see what measures can be developed to increase financial 
literacy and education.
    I agree with you. It is not in lieu of or in place of 
appropriate legislation or appropriate regulation. But it does 
seem to me that there is a clear need for it out there. This 
was something Secretary Summers had been working on at the 
Treasury Department during his tenure there and I know that it 
is something that the Fed has been addressing.
    I don't know if you have specific ideas now, but we would 
be interested in continuing to work with you. Is there anything 
that you think should be placed on the agenda now with respect 
to financial education?
    Mr. Ferguson. No. I think you are right to raise this as an 
important issue. Obviously, I think the Federal Reserve and 
others can have a role in raising the awareness in our 
communities and the importance of this matter. The Federal 
Reserve banks, the 12 of them, have very active outreach 
efforts.
    I believe I can speak for myself since I am speaking in a 
personal capacity here, and I would be happy to continue to 
interact with you and the staff as we together think through 
what we can do in the way of financial literacy. It can be very 
important in dealing with a number of the consumer concerns 
that I know are on your mind.
    Chairman Sarbanes. Governor Ferguson, thank you very much. 
It has been a very interesting hearing.
    I have talked to Senator Gramm. We intend to schedule your 
nomination for markup next week, on the 20th, when we are 
holding our hearing with the regulators to oversee the 
condition of the financial system. It would be my intention in 
the course of that hearing when we have a quorum and it is 
appropriate, to bring your nomination up. Hopefully, if we can 
move on that agenda, we can perhaps complete action in the 
Senate with respect to your nomination before the 4th of July 
recess, although we don't control the Senate floor.
    Mr. Ferguson. I appreciate that.
    Chairman Sarbanes. We will try to move you out of the 
Committee promptly and get you into place. We know that 
Governor Kelly is intending to resign, as I understand it. 
There are already, what, two vacancies, I guess, at the Fed, 
without the vacancy that would be created by his resignation.
    We appreciate that Chairman Greenspan, although the country 
thinks so, does not make these decisions all by himself, that 
he has a Board that also participates in making the decisions. 
We hope to give him some colleagues to help him out.
    Thank you very much for coming today.
    Mr. Ferguson. Thank you very much, Mr. Chairman.
    Chairman Sarbanes. The hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Prepared statements, biographical sketch of the nominee, 
response to written questions, and additional material supplied 
for the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    Before I introduce Governor Ferguson, I would like to take a moment 
to discuss the agenda of the Banking, Housing, and Urban Affairs 
Committee in the coming weeks.
    The Banking Committee has a significant and pressing agenda of 
legislative matters that it will have to address in relatively short 
order. I have asked Senator Bayh, the Chairman of the International 
Trade and Finance Subcommittee, to take responsibility for the 
reauthorization of the Export-Import Bank, which expires on September 
30. A Subcommittee hearing on the reauthorization has been scheduled 
for next Tuesday afternoon, June 19.
    I have asked Senator Reed, the Chairman of the Housing and 
Transportation Subcommittee, to oversee the reauthorization of the 
Multifamily Assisted Housing Reform and Affordability Act, the so-
called mark-to-market program for multifamily housing, which also 
expires on September 30. A Subcommittee hearing on that legislation has 
been scheduled for next Tuesday morning.
    I asked Senator Schumer, the Chairman of the Economic Policy 
Subcommittee, to take responsibility for the reauthorization of the 
Defense Production Act, which expires on October 12. A Subcommittee 
hearing on that legislation may be scheduled for later this month.
    The Iran-Libya Sanctions Act (ILSA), which falls under the 
jurisdiction of the Banking Committee, expires on August 5. I hope to 
hold a full Committee hearing on that legislation in the last week of 
June. If the appropriate oversight hearings on these expiring laws can 
be held this month, I would hope the Committee could move to a markup 
of them after the July 4 recess.
    In addition, the Committee reported out earlier this year a 
reauthorization of the Export Administration Act by a 19-1 vote. That 
legislation has been strongly endorsed by the Administration and we 
hope to take it up on the Senate floor as soon as the floor schedule 
permits. The Committee also reported out by voice vote earlier this 
year a bill dealing with SEC fees and pay parity for SEC employees. The 
bill was passed by the Senate and we are now awaiting action by the 
House on the bill. I am hopeful the Congress will be able to complete 
action on this legislation.
    Finally, last year the Committee passed the Manufactured Housing 
Improvement Act. A technical correction, which is time sensitive, is 
needed to allow funds collected to run the program to be spent. I have 
consulted with the Administration, Senator Gramm, and others on 
legislation that would make the technical fix. I hope we can pass that 
legislation by unanimous consent on the Senate floor, perhaps this 
evening, and that the House will then take it up and pass it as well.
    Next Wednesday, June 20, the Committee will hold an oversight 
hearing on the condition of the banking system. The witnesses will be 
Alan Greenspan, Chairman of the Federal Reserve; Jerry Hawke, 
Comptroller of the Currency; Donna Tanoue, Chair of the FDIC; and Ellen 
Seidman, Director of the Office of Thrift Supervision. In addition, I 
expect the Committee to hold hearings this month on nominations pending 
before the Committee.
    Next month I anticipate the Committee will hold hearings on 
predatory lending, the state of metropolitan and rural America, and 
financial privacy. Later this year I expect the Committee to review, 
among other issues, money laundering, and financial education and 
literacy.
    With that as a preface, I would now like to welcome before the 
Banking Committee this morning Roger Ferguson, who has been nominated 
by the President for a full 14 year term as a Member of the Board of 
Governors of the Federal Reserve.
    Governor Ferguson was originally appointed as a Member of the 
Federal Reserve in 1997 to complete a term which expired on January 31, 
2000. He was nominated on September 14, 1999, by President Clinton for 
a full term as a Member of the Federal Reserve Board, as well as Vice 
Chairman of the Federal Reserve. He was confirmed by the Senate to be 
Vice Chairman of the Federal Reserve on September 29, 1999, and his 
term as Vice Chairman expires on October 5, 2003. No action was taken 
in the last Congress on his nomination to be a Member of the Federal 
Reserve Board.
    Governor Ferguson was nominated by President Bush for a full term 
as a Member of the Federal Reserve on April 24. Given the importance of 
his position, and the period of time he has been awaiting action on his 
nomination, I thought it appropriate to schedule this nomination 
hearing today.
    Governor Ferguson has both a law degree and a Ph.D. in economics 
from Harvard. After graduate school, he practiced law in New York from 
1981-1984 with the firm of Davis, Polk & Wardwell. He then joined the 
consulting firm of McKinsey & Company, where he became a partner in 
1992 and Director of Research and Information Systems. As I mentioned, 
he has served as a Member of the Board of Governors of the Federal 
Reserve since 1997, and as Vice Chairman since 1999.
    By all accounts, Governor Ferguson has served with great 
distinction as a Member of the Federal Reserve. He chaired a working 
group of the Federal Open Market Committee (FOMC) to review the FOMC's 
disclosure practices. Acting on a working group recommendation, the 
FOMC altered its disclosure practices, including deciding to issue a 
statement after every FOMC meeting announcing any action taken by the 
FOMC and indicating the balance of risks facing the economy.
    He oversaw the Fed's preparations for the Year 2000 computer 
challenge. He also served as Chairman of the Joint Year 2000 Council, 
sponsored by the Bank for International Settlements, to provide 
guidance to the global financial supervisory community as it prepared 
for the Year 2000. He recently completed service as Chairman of the 
Group of Ten Working Party on Financial Sector Consolidation, which 
examined the causes and potential effects of consolidation in the 
financial sector worldwide.
    As Vice Chairman, he has served as the Federal Reserve's Chief 
Administrative Officer. He is currently Co-Chairman of the Federal 
Reserve's Payments System Development Committee, which addresses public 
policy issues arising in connection with developments in the Nation's 
payments infrastructure.
    Governor Ferguson has also been a careful observer of the economy, 
and he has focused particularly on the role of information technology 
in productivity growth.
    It is a commentary on the high professional standards he has set 
during his service on the Federal Reserve that he was nominated for a 
full term on the Board by both President Clinton and President Bush. He 
mentioned at the time of his first confirmation that the appointment of 
Andrew Brimmer to the Federal Reserve served as an inspiration to him 
as a youth and focused his attention on serving on the Federal Reserve 
as a career goal. Perhaps his service on the Federal Reserve now will 
serve as an inspiration to other young people to pursue public service 
in their careers.
    I am pleased to welcome Governor Ferguson before the Banking 
Committee today.
















RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM ROGER W. 
                         FERGUSON, JR.

Decline in Personal Saving Rate

Q.1. In a speech before the American Bankers Association, 
Federal Reserve Board of Governors Member Edward Gramlich said 
that, ``Higher rates of national savings are among the unsung 
heroes of the good U.S. economic performance in the late 
1990's.'' However, the most recent data from the White House 
shows a substantial decline in personal savings from over 5 
percent in 1996 to minus 0.9 percent today. Do you think that 
this is a serious problem, and if so, what can we do to 
ameliorate it? What position does this place Americans in if 
the economic slowdown worsens? Finally, what are the effects of 
this decline with respect to national investment levels and GDP 
growth?

A.1. In considering the decline in the personal saving rate, it 
is important to remember that it is national saving, not 
personal saving, that provides the source of funds for 
investment spending in the United States. Over the past several 
years, the national saving rate has risen fairly steadily, 
increasing from about 15.6 percent of GDP in 1993 to 18.3 
percent of GDP in 2000. This increase in national saving helped 
to fuel a boom in investment that raised productivity and 
boosted GDP. The increase in national saving occurred despite a 
steeply declining personal saving rate, as increases in Federal 
and business saving more than offset declines in personal 
saving. Foreign investment in the United States also increased 
significantly during the past decade, providing further support 
to domestic investment. The experience of the past several 
years shows that national saving and investment can increase 
even when personal saving is falling.
    From a microeconomic perspective, the decline in the 
personal saving rate, rather than reflecting a problem in the 
household sector, primarily reflects improving household 
balance sheets. The boom in the U.S. stock market led 
households to increase personal consumption more rapidly than 
income, and thereby lower personal saving. The recent weakness 
in the stock market has reduced household net worth relative to 
income, though this ratio remains elevated. Moreover, household 
credit quality remains fairly good. Thus, although there are 
risks, households entered this period of economic slowing in a 
reasonably good financial position.

Japan

    According to the Japanese banking industry's own publicly 
disclosed numbers, about 30 percent of bank assets are 
classified by examiners as having problems, which range from 
minor to serious. Experience in the United States and other 
industrialized countries indicates that if a bank has 
classified assets of 10 percent to 15 percent of total assets, 
it is in danger of becoming insolvent and needs immediate 
supervisory action. The Finance Minister of Japan is reported 
to have said a few months ago that ``Japan's fiscal situation 
is at the verge of collapse.'' Data from various official and 
academic sources indicate Japan's government debt is well over 
100 percent of GDP and growing rapidly, and some experts 
believe Japan is reaching its financing limits.

Q.2.a. What is your assessment of the Japanese banking system?

A.2.a. As is widely recognized, Japanese banks have sizable 
asset quality problems. These include high levels of disclosed 
nonperforming loans. The most recent figures indicate that 
``problem'' loans, defined as nonperforming loans plus loans 
considered to be at risk of becoming nonperforming, account for 
approximately 22 percent of Japanese GDP. The Japanese 
government has set aside the equivalent of about $580 billion 
to help banks (14 percent of 2000 GDP). By contrast, the cost 
to U.S. taxpayers of the savings and loan crisis amounted to 
$124 billion in 1989 dollars, or 2.2 percent of 1989 GDP. I 
have said in the past that the weakness of the Japanese banking 
system creates a unique policy challenge for Japanese 
policymakers as they work to address the current condition of 
their economy.

Q.2.b. What risk, if any, does the situation in Japan pose to 
both U.S. financial institutions and the U.S. economy?

A.2.b. U.S. banks are aware of the asset quality problems at 
Japanese banks and manage their exposures accordingly. 
According to Federal Reserve statistical releases, the cross-
border exposure of U.S. banks to Japanese entities has been 
reduced from 36 percent of U.S. bank capital in December 1990 
to 9 percent of U.S. bank capital in December 2000. U.S. 
supervisory authorities are paying careful attention to 
possible problems created by the activities of Japanese banks 
that operate in U.S. markets.

Q.2.c. What actions should be taken to improve it?

A.2.c. The Japanese government has recently announced a plan to 
reduce nonperforming loans at banks and lower bank exposure to 
swings in equity prices. This program accords with the approach 
that authorities have taken to date. This plan may have the 
potential to contribute to improving the soundness of the 
Japanese financial system. However, it is critically important 
that the implementation of the plan, or any similar proposals, 
be pursued very aggressively.

Remittances

Q.3. It has recently come to my attention that approximately 
$24 billion leaves America on an annual basis in the form of 
remittances, sent mostly by Hispanics back to their countries 
of origin which are mainly in Central and South America. 
However, only around $20 billion arrives in these countries, 
meaning that $4 billion--over 16 percent--is absorbed in 
transaction costs. What are the economic ramifications, in 
terms of efficiency and equity, of such high transaction costs, 
and what do you believe should be done, if anything, to reduce 
these transaction costs?

A.3. Both banks and nonbanks in the United States currently 
provide cross-border money transfer services to residents of 
the United States. These services include traditional 
electronic wire transfers between a U.S. bank and its overseas 
correspondent using telecommunications networks such as SWIFT; 
electronic money transfer services provided by nonbanks such as 
MoneyGram or Western Union; ATM withdrawals overseas using 
international EFT networks to debit the cardholders' U.S. bank 
accounts; and other emerging networks.
    The fees associated with cross-border money transfers may 
include charges for initiating the transfer itself, charges to 
convert U.S. dollars to a foreign currency, and possibly fees 
for the receipt of funds by beneficiaries. Fees may also vary 
based on the service provider and service selected, the point 
of origin, the point of destination, the amount of money being 
sent, and the method of funding the payment. Additional charges 
also may be imposed on beneficiaries by the receiving bank for 
delivery of funds. Charges will vary depending on the amount of 
manual work required by the bank as some wire transfers can 
involve significant, labor intensive handling costs for banks. 
In the cross-border context, bank charges for both consumer and 
corporate wire transfers tend to be higher than the fees 
charged by nonbank money transmitters due to lower volumes of 
activity, additional handling costs, and correspondent banking 
fees.
    The Federal Reserve Board has been working to explore 
further whether general improvements could be made in handling 
cross-border funds transfers using the automated clearing house 
(ACH), which is a system through which many U.S. consumers 
receive electronic payroll deposits and Government benefits. 
The Federal Reserve will launch in July a service for sending 
cross-border payments to Canada through the ACH and, then later 
this year, will be investigating the feasibility of cross-
border ACH payments with Mexico and other countries. In 
addition, the National Automated Clearing House Association 
(NACHA), through its Cross-Border Council, is working on a 
global effort to improve cross-border ACH payments, known as 
WATCH (Worldwide Automated Transaction Clearing House).
    The Federal Reserve has also discussed the issue of the 
cost, timing, and transparency of cross-border transfers with 
other central banks, most recently through the G-10 central 
banks' Committee on Payment and Settlement Systems. The 
European Central Bank, for example, is carefully monitoring 
this issue in the European context and has adopted policies to 
encourage greater private-sector efficiency in cross-border 
retail transfers within Europe in advance of the introduction 
of Euro notes and coins in 2002.
    In general, consumers can choose from a variety of 
competing alternatives for making cross-border money transfers, 
including traditional bank wire transfer, nonbank money 
transmitters, international ATM/EFT networks, and other 
emerging electronic payment transfer services, as well as non-
electronic methods such as checks and money orders.\1\ Several 
of the cross-border remittance services available to consumers 
appear to be accessible, easy to use, and provide for rapid and 
efficient transfer services. As a result of increasing 
competition, fees for making cross-border consumer transfers 
also appear to be decreasing, although costs still vary 
significantly across companies and countries.\2\ Looking ahead, 
the projected strong growth of overseas remittances is likely 
to continue to increase competition and the number of 
alternatives for making cross-border transfers.
---------------------------------------------------------------------------
    \1\ Examples of emerging networks are the International Remittance 
Network (IRnet) of the World Council of Credit Unions, the City 
National Bank of New Jersey/Fonkoze system, and RapidMoney.
    \2\ Manuel Orozco, ``Family Remittances to Latin America: The 
Marketplace and Its Changing Dynamics,'' InterAmerican Dialogue, 
Washington, DC, May 2001.
---------------------------------------------------------------------------
    Both technological change and increasing market demand for 
remittance services should have the effect of increasing 
competition and lowering fees. The Federal Reserve, therefore, 
sees no need for new legislation in this area at this time. 
Particularly in the cross-border cases, it would be all too 
easy for institutions to adjust to additional regulatory 
burdens by reducing cross-border services and raising exchange 
and other implicit charges to the disadvantage of U.S. 
residents. Instead, policies should aim to encourage 
competition and new alternatives commensurate with growing 
market demand.

Consolidation

Q.4.a. Why have we not seen more mergers between banks and 
insurers after passage of the Financial Services Modernization 
Act? Are you surprised that there have not been more mergers in 
the financial services sector since the passage of this bill 
and do you expect an acceleration of this pace over the next 
few years?

A.4.a. The provisions of the Financial Services Modernization 
Act allowing broader financial powers and affiliations for 
financial holding companies (FHC's) have been effective for 
only a little more than 1 year. During that time, more than 500 
bank holding companies have elected FHC status. While there 
have been a few affiliations between these banking 
organizations and insurers during the past year, many companies 
have chosen FHC status under the Act in order to be able to 
engage in general insurance agency activities, which, prior to 
passage of the Act, were severely limited. This use of the 
broader powers achieves one of the primary purposes of the Act, 
which is to increase competition in the provision of financial 
services and allow more efficient delivery of a broad range of 
financial products and services to customers.
    The decision to merge with another company is a complex 
management decision that ultimately must be made by each 
company based on its own consideration of the business 
advantages and costs of the affiliation. Many companies appear 
to be still evaluating whether the affiliations enabled by the 
Act will enhance their business plan and build on their core 
skills. Beginning insurance agency activities while considering 
affiliation with an insurer represents a cautious approach that 
seems to reflect a testing by the banking industry of the costs 
and benefits of conducting full insurance activities. As 
companies become more familiar and more comfortable with the 
risks of these new activities, it is possible that broader 
affiliations will become more prevalent. In this regard, there 
are a number of added complexities resulting from the 
multistate regulatory regime applicable to insurance 
underwriting.
    It is also noteworthy that many insurance underwriters are 
in mutual form or in the process of demutualizing. Acquisitions 
involving mutual companies are very complex and the constraints 
inherent in the mutual form typically limit the number and size 
of potential partners.
    There has been more affiliation activity between the 
banking and securities industries. Five of the 10 largest and 
11 of the 20 largest securities broker-dealers are affiliated 
with banks. And with the passage of the Financial Services 
Modernization Act, these securities firms are permitted to 
engage in full securities underwriting, dealing and brokerage 
activities without the revenue and other constraints previously 
applied under the Glass-Steagall Act to securities firms 
affiliated with banks.

Q.4.b. You have argued that consolidation in the financial 
services sector has not caused significant efficiency gains or 
losses. Specifically, you have stated that overall operating 
efficiency gains from consolidation are weak. If there are 
limited operating efficiencies to be gained by consolidation, 
what are the benefits and the potential risks of consolidation?

A.4.b. Studies that examine the effects of mergers and 
acquisitions (M&A's) on the operating efficiency of financial 
services providers have generally found these effects to be 
quite weak. At the same time, a desire to improve efficiency is 
one of the most frequently cited motives for consolidation. 
These seemingly contradictory findings may reflect the 
differences between the past and the present, between average 
experiences and individual firms' experiences, between expected 
outcomes and realized outcomes, or between measured accounting 
costs and economic costs.
    Most of the studies that find little or no evidence of 
efficiency gains associated with M&A's in the financial 
services sector predate the most recent wave of financial 
consolidation. Financial consolidation in the future may be 
quite different from that which has taken place in the past, 
because of the effects of the Financial Services Modernization 
Act. Thus, even if the types of M&A's that were permissible 
prior to 1999 did not result in any significant efficiency 
gains, future transactions could produce substantial gains as 
firms take advantage of economies of scope that were not 
previously available to them.
    Even if mergers and acquisitions do not lead to significant 
improvements in operating efficiency, there may be other 
potential benefits associated with these transactions. 
Consolidation, for example, can lead to a reduction in firm 
risk through geographic or product diversification. M&A's also 
may allow firms to increase their size and /or scope quickly, 
which may enable them to better serve the needs of their 
customers. At the retail level, however, there is some evidence 
of loss of customers to smaller rivals in the early post-merger 
years.
    Ultimately, it is the responsibility of shareholders to 
determine whether the potential and resultant benefits of 
consolidation are real or imaginary. The regulators are 
responsible for monitoring and managing potential social and 
economic risks. One risk is that consolidation could lead to 
increased monopoly power, resulting in harm to consumers of 
financial services. Bank regulators and the Department of 
Justice examine the competitive effects of proposed bank 
mergers and acquisitions, requiring divestitures as needed, in 
order to minimize this risk. Consolidation could also result in 
the formation of financial institutions that are so large and 
complex that if they became troubled they might pose a risk to 
the safety and soundness of the entire banking system. Bank 
regulators review proposed bank mergers and acquisitions for 
their effects of the safety and soundness of the firms involved 
and monitor the financial condition of banking organizations. 
However, the regulators do not have the authority to reject a 
merger or acquisition that meets both competitive and safety 
and soundness standards just because of the scale of the 
resulting organization.

General Economics / Budget / Tax Cut

Q.5. In your opinion, what is the impact of fiscal policy on 
long-term interest rates? Specifically, if we return to the era 
of deficit spending, what will be the result on interest rates, 
private investment, and employment? What consequences will the 
tax cut have for the Fed's conduct of monetary policy?

A.5. Fiscal policy, the associated stance of the Federal 
Government in credit markets, and the effect of fiscal policy 
on national saving can have a significant effect on interest 
rates and the volume of credit available to households and 
businesses. The decline of the deficit and emergence of budget 
surpluses in the 1990's very likely relieved pressures on 
financial markets and freed up savings to be used by households 
to finance new houses, autos, and other durable goods and by 
businesses to acquire capital equipment. A reemergence of large 
and of persistent Federal budget deficits would be likely to 
keep interest rates higher than they otherwise would be, 
constrain the build-up of the capital stock, and hence impinge 
on increases in productivity.
    The Federal Reserve does not respond directly to tax cuts, 
or fiscal policy in general. Our goal is to maintain, as best 
we can, a growth rate in aggregate demand that matches the 
economy's ability to increase aggregate supply. Many factors, 
including developments with respect to fiscal policy, can 
potentially influence aggregate demand and should be factored 
into our judgment about the likely course of the economy.

The Effect of Productivity on Long-Term
Economic Projections

Q.6. I have been told that productivity gains as little as one-
tenth of 1 percent below the projected 10 year rate would 
result in a reduction of CBO's projected surplus by $250 
billion over the 10 year period. Thus, you can imagine my 
concern when it was reported that productivity fell by -1.2 
percent in the first quarter of 2001. What are the implications 
of this with respect to the CBO budget surplus projections?

A.6. The drop in nonfarm business sector output per hour in the 
first quarter of 2001 that was reported recently by the Bureau 
of Labor Statistics, comes on the heels of gains averaging 
nearly 3 percent (annual rate) over the preceding 5 years. The 
first quarter decline reflected a 1 percent rate of increase in 
output for the sector that was more than matched by a 2.2 
percent rate of increase in hours worked. It should be noted 
that the rise in hours worked last quarter reflected, in part, 
a surge in the volatile component for self-employed workers 
(about 15 percent at an annual rate) that clearly is not 
sustainable; excluding the hours of self-employed workers 
(about 10 percent of the total), productivity was about flat in 
the first quarter. In any event, a step down in productivity 
growth is quite common when output growth slows, as it has 
since the middle of last year.
    The pattern of productivity performance in the second half 
of 2000 suggests that the underlying, or structural, rate of 
productivity growth is still quite robust. Strong growth of 
structural productivity would also be consistent with the 
anecdotal reports from business leaders, who still see a 
sizable untapped reservoir of potential efficiency gains to be 
had from recent advances in information technology. In that 
context, it is worth noting that survey results from the 
National Association of Purchasing Management indicate that 
most firms feel they are far from fully achieving the potential 
efficiencies that could ultimately be gained from applying 
technology to their supply chain management.
    I am cautiously optimistic that the rate of structural 
productivity growth will be reasonably well maintained, and, if 
it is, the drop in measured output per hour in the first 
quarter will not have significant implications for CBO's long-
run budget outlook.

Distributive Effects of the Economic Expansion
(and Slowdown)

Q.7. I am pleased to note that the current expansion has 
benefited people who have traditionally been left out, such as 
minorities, women, and youth. In May of 1992, the unemployment 
rate for African-Americans was 14.7 percent, today it is down 
to 8.0 percent; the rate for those between 16 and 19 years of 
age was 20.1 percent, now it is 13.6 percent; and the 
unemployment rate for women has fallen from 7.1 percent to 4.3 
percent. Do you believe that these groups will be the first to 
suffer and feel the effects from the economic slowdown the 
hardest?

A.7. As you indicate, the current economic expansion has 
benefited all segments of the population, including minorities, 
women, and youth. Indeed, in 2000, the unemployment rates for 
African-Americans and Hispanics were at the lowest levels since 
unemployment statistics for these minority groups were first 
collected in the early 1970's. Similarly, the average 
unemployment rates last year for women and teenagers were the 
lowest seen since the 1950's. For women, the unemployment rate 
in 2000 was roughly the same as for men. For each of the other 
groups, however, unemployment rates continue to run well above 
the unemployment rate for the U.S. workforce as a whole, with 
the differential in 2000 ranging from 1\3/4\ percentage points 
for Hispanics to 3\1/2\ percentage points for African-Americans 
and 9 percentage points for teenagers.
    Moreover, it unfortunately seems to be the case that 
minority and youth unemployment rates tend to be more sensitive 
to cyclical changes in the economy than unemployment in 
general. Economists point to a variety of reasons for this 
disparity, including lower average levels of education and work 
experience for these groups, as well as differences in the 
geographic proximity of jobs to different segments of the 
population. Indeed, in the current situation, it does appear 
that unemployment rates for minorities and teenagers have moved 
up a bit more quickly than for white non-Hispanics, although it 
is difficult to get a clear picture of the relative changes in 
unemployment rates since the beginning of this year because of 
the sampling variability in the monthly statistics published by 
the Bureau of Labor Statistics. In particular, comparing the 
latest 2 month average for April and May of this year with the 
fourth quarter of last year, the unemployment rate has risen a 
bit less than 2 percentage point for white non-Hispanics, and 
between 2 and 1 percentage point for African-Americans, 
Hispanics, and teenagers.














         RESPONSE TO QUESTIONS OF EIGHT MEMBERS OF THE

       HOUSE OF REPRESENTATIVES IN A LETTER DATED JUNE 12

                  FROM ROGER W. FERGUSON, JR.

Concerning Diversity in the Federal Reserve System

Questions are numbered according to their sequence in the 
letter.

Q.1.a. What has the Federal Reserve Board done in the past 8 
years to address this problem? If no formal program or policy 
is in place now, do you plan to implement one? When?

A.1.a. Even before the 1993 Report, the Federal Reserve Board 
had programs in place to address diversity issues in the 
workplace. Since the Report, the Board has taken a number of 
concrete steps to strengthen our EEO and employment-diversity 
programs and policies including:

 Instituting biannual EEO briefings to the Board.

 Holding officers, managers, and supervisors 
    responsible through an EEO component in performance 
    objectives.

 Providing senior management with information on EEO 
    trends in each division during quarterly meetings.

 Conducting diversity training for all Board employees. 
    Officers, managers, and supervisors also receive mandatory 
    EEO training.

 Expanding outreach programs to both inform minorities 
    about the Federal Reserve and to build a diverse pool of 
    candidates for positions.

 Reviewing our EEO and employment practices and 
    evaluating our programs against other public- and private-
    sector programs.

    As to recent appointments, during my tenure the Board has 
appointed 10 division /office directors (the Board has 14 
division /office directors, and those staff positions are the 
most senior at the Board). Five of these 10 director appointees 
are women, including 1 African-American and 1 Hispanic. In 
addition, we appointed 38 other officers, of whom 19 are women 
and 6 are minorities.
    I am personally committed to achieving as diverse a 
workforce as possible, recognizing that the Board faces 
challenges in reaching that goal. Due to the highly technical 
nature of most of our professional positions--economist, 
financial analyst, computer specialist, and attorney--the Board 
is often in competition with the private sector for the most 
highly qualified job candidates. Because of salary constraints, 
the Board is often at a competitive disadvantage. In spite of 
the challenges the Board faces in realizing our aspirations, 
the representation of women and minorities in our officer 
positions is roughly comparable to that for other Federal 
Government agencies. We will continue our efforts to attract 
the most qualified and diverse staff possible.

Q.1.b. Does the Federal Reserve continually evaluate the 
diversity representation of its workforce, particularly in 
professional and /or technical positions? If so, who is 
responsible for such an evaluation and to whom does he /she 
report the results?

A.1.b. The EEO Programs Office, under the guidance of the EEO 
Programs Director, continually evaluates the Board's workforce. 
The results are discussed with directors or senior staff 
members during quarterly meetings.
    The EEO Programs Director briefs the Board twice a year on 
EEO matters and briefs the Committee on Board Affairs (which I 
Chair) and the Senior Management Council (which consists of the 
Directors of the Boards divisions and offices) as appropriate 
on such matters.

Q.1.c. What are the current diversity statistics for the 
Federal Reserve System?

A.1.c. See the following Table.




    For data on Federal Reserve System Officers, please see 
Table 2, in the answer to question 2.c.

Q.1.d. Where and how does the Federal Reserve recruit 
minorities and women for senior officer level positions?

A.1.d. Board official staff positions are generally filled 
internally, although for the most senior staff positions we 
also consider external candidates. These individuals have 
generally come from within the Board from grades 29 and 28, the 
highest staff grade levels. Ongoing efforts attempt to increase 
the diversity of the pool of candidates to be appointed to the 
official staff.

Q.1.e. Does the Federal Reserve evaluate its methods of 
promoting minorities and women, and if so, what have you found?

A.1.e. The Board monitors the results of its promotions with 
regard to women and minorities. Progress has been made at the 
division director and officer levels. As previously mentioned, 
during my tenure on the Board, 10 division /office directors 
have been appointed, of whom 5 are women, including 1 African-
American and 1 Hispanic. I believe this is a positive step.

Q.2.a. To your knowledge, have any of the Report's 
recommendations been implemented? Why or why not?

A.2.a. In response to the Report, the Board strengthened its 
existing program in the following ways:

 The EEO evaluation for Federal Reserve Banks was 
    changed to require EEO performance reports by the Banks 
    (which are evaluated by the Board).

 Annual meetings are held at each Reserve Bank with 
    executive Bank staff and Board staff to discuss the 
    evaluation of EEO performance.

 All Federal Reserve Banks have EEO officers reporting 
    directly to the Bank's first vice president or president.

 A conference is held annually at the Board for the 
    Federal Reserve Bank EEO officers to address EEO 
    performance evaluations and issues of common concern.

    Campus recruitment by the Board for professional and for 
intern positions has been expanded at predominately minority 
colleges and universities. We also recruit more extensively at 
minority professional organizations and diversity job fairs. 
The Board also advertises in minority publications such as the 
Black Collegiate and the HISPANIC magazine and on numerous 
diversity employment Internet sites.
    Among the schools and associations at which we conduct 
recruitment and outreach activities are Howard University, 
Morehouse, Tuskegee, Florida A&M, University of Miami, Spelman, 
Clark- Atlanta, Xavier, Dillard, Southern at Baton Rouge, 
Florida International University, University of New Mexico, 
University of Texas, Hispanic Association of Colleges and 
Universities, National Black and Hispanic MBA Associations, 
National Association of Urban Bankers, Society of Hispanic 
Engineers, and Society of Mexican American Engineers and 
Scientists.
    In conjunction with the Board's summer intern program, 
minority candidates are solicited from INROADS and the Hispanic 
Association of Colleges and Universities.

Q.2.b. Does the Federal Reserve Board have a diversity 
recruitment, retention, and promotion strategy? If so, how do 
you explain the decreasing numbers of professional and 
technical positions held by Hispanics and Native Americans 
between 1990 and 2000?

A.2.b. Between 1990 and 2000, Hispanic representation in the 
professional and technical categories has increased slightly. 
Native American representation in professional categories has 
also increased slightly. The Board is continually reviewing 
recruitment, retention, and promotion to assess which 
initiatives are succeeding and where improvement is needed. 
Moreover, the Board reviews the EEO practices of other 
Government and private organizations to obtain ideas for 
enhancing its programs.

Q.2.c. Should a follow-up investigation or study be conducted 
to investigate why women and minorities remain significantly 
underrepresented at the highest levels of the Federal Reserve 
and the Federal Reserve Banks, and are almost completely 
excluded from high salaries and promotions to senior level 
positions at the Federal Reserve?

A.2.c. We do not believe that any group is ``almost completely 
excluded from high salaries and promotions.'' Since 1992, the 
Board and the Federal Reserve Banks have made progress in 
developing and in promoting women and minorities to senior-
level positions and the Federal Reserve is committed to 
continue doing so (see the following Table).



Q.3.a. Has that recommendation been implemented?

A.3.a. Yes. The Board continues to enhance its college 
recruitment activities. We have made efforts such as hosting 
guest speakers; working with deans of economic, computer 
science, math, and graduate programs; and participating in 
college fairs. The Board has sponsored a Symposium for 
Historical Black Colleges and Hispanic Association of Colleges 
and Universities. The agenda for the symposiums included 
presentations by the Board's economic divisions to make 
participants aware of employment opportunities at the central 
bank. See the answer to question 2.a. for a more detailed 
discussion of our minority recruitment and outreach activities.

Q.3.b. If so, how long has the Federal Reserve Board had this 
program in place and how effective has it been in recruiting 
and in retaining minorities?

A.3.b. The Federal Reserve Board had such programs in place 
before 1993, and since then it has enhanced them. As a result 
of these programs, minorities are well represented among summer 
interns, but our programs aimed at recruiting minorities for 
full-time positions have had limited success to date. The 
success in recruiting summer interns is significant because 
summer interns are a source of applicants for full-time 
positions. We will continue to pursue these programs. I 
recognize from my personal experience and observation that it 
will likely be a multiyear effort before we see results.
    The Board also recruits qualified minority candidates 
through advertising, referrals, unsolicited resumes, general 
college recruiting, web sites, and other recruitment 
techniques.

Q.4.a. How can the Federal Reserve be a credible ``cop'' if its 
own practices of recruiting and promoting women and minorities 
into top positions at the Federal Reserve are suspect?

A.4.a. I do not believe that our practices are suspect, and I 
am personally committed to ensuring that all employees of the 
Board are fairly treated in all aspects of their employment. 
The Board has credible recruitment and promotion practices, and 
we constantly review them to determine how they can be 
improved.

Q.4.b. I have heard rumors of a hostile work environment and of 
intentional discrimination in the hiring and promotion of 
minorities at the Federal Reserve. To your knowledge, is the 
work environment at the Federal Reserve hostile and if so, what 
steps have you taken to address these problems?

A.4.b. I do not believe we have a hostile work environment at 
the Federal Reserve Board. We would not tolerate it, and we 
have strong policies with which to address violations. Should 
any indications of a hostile work environment come to my 
attention, I would consult with experts, both internally and 
externally, to determine the best course of action, and I would 
expect the Board to implement fully measures to respond to such 
allegations. I am strongly opposed to a hostile work 
environment. I believe that all Federal Reserve employees 
should be allowed to contribute fully to our mission, and they 
are expected to do so.





                            NOMINATIONS OF:
                    ANGELA M. ANTONELLI, OF VIRGINIA
                     TO BE CHIEF FINANCIAL OFFICER
                     U.S. DEPARTMENT OF HOUSING AND
                           URBAN DEVELOPMENT
                    RONALD A. ROSENFELD, OF OKLAHOMA
                  TO BE PRESIDENT, GOVERNMENT NATIONAL
                  MORTGAGE ASSOCIATION (GINNIE MAE)
                     U.S. DEPARTMENT OF HOUSING AND
                           URBAN DEVELOPMENT

                                  AND

                     JENNIFER L. DORN, OF NEBRASKA
                  TO BE FEDERAL TRANSIT ADMINISTRATOR
                   U.S. DEPARTMENT OF TRANSPORTATION

                              ----------                              


                        THURSDAY, JUNE 21, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10 a.m., in room SD-538 of the Dirksen 
Senate Office Building, Senator Paul S. Sarbanes (Chairman of 
the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. I call our Committee hearing to order.
    We just finished a vote, so we were delayed a little bit. 
We will now move ahead.
    This morning, the Senate Committee on Banking, Housing, and 
Urban Affairs will be considering three nominations, the 
nominations of Angela Antonelli, to be the Chief Financial 
Officer of HUD, Ronald Rosenfeld, to be President of Ginnie 
Mae, and Jennifer Dorn, to be the Federal Transit 
Administrator.
    We will consider the nominees in two panels. On the first 
panel, we will take the HUD nominees, Ms. Antonelli and Mr. 
Rosenfeld. And on the second panel, we will consider Jennifer 
Dorn to be the Federal Transit Administrator.
    I want to welcome these nominees. We are pleased they are 
able to appear before us today. We understand the importance to 
the Administration of filling its top positions. This Committee 
has sought to move promptly on nominations as they are sent to 
us.
    Often, the President announces an intent to nominate. There 
seems to be something of an assumption, then, by the press and 
the public that the nomination is before the Senate. But that 
is not the case. The nomination is not before us until we 
actually get the papers completed and that, regrettably, often 
seems to take quite a period of time.
    Ms. Antonelli, nominated to be HUD's CFO, is the Director 
of The Thomas A. Roe Institute for Economic Policy Studies of 
The Heritage Foundation, where she has been overseeing the 
Foundation's research on budget, tax, regulatory, labor, 
technology, and environmental policy, a rather extensive brief, 
if I may say so.
    She has worked at the General Accounting Office, as well as 
worked 3 years for the Office of Management and Budget.
    Ms. Antonelli is a Phi Beta Kappa graduate from Cornell 
University and received a Master's in Public Administration 
from Princeton University, my alma mater, I might note.
    The old school tie, I guess, here, Ms. Antonelli, so to 
speak.
    [Laughter.]
    Ronald Rosenfeld, nominated to be President of Ginnie Mae, 
has spent much of his career on housing and real estate issues, 
as a private developer and in HUD's Office of Housing. Most 
recently, he was Secretary of Commerce for the State of 
Oklahoma. He too has an impressive educational background, 
having graduated with a degree in economics from the University 
of Pennsylvania and a law degree from Harvard, also an alma 
mater of mine.
    We are covering all the bases here today.
    [Laughter.]
    Mr. Rosenfeld and Ms. Antonelli will be working on issues 
that will be of great importance. Housing and urban affairs are 
issues that I hope to explore further in this Committee. It is 
critical that HUD have the needed resources and staffing, 
including qualified people, to head the offices of HUD. Both 
the CFO of HUD and the President of Ginnie Mae play very 
important roles in housing low-income Americans.
    The President of Ginnie Mae directs and provides oversight 
for all of Ginnie Mae's activities. Ginnie Mae guarantees more 
than $1\1/2\ trillion in mortgage-backed securities and has 
securitized 95 percent of all FHA and VA mortgages.
    The Chief Financial Officer of HUD is responsible for 
overseeing a budget of over $30 billion and the performance of 
an agency that works on issues ranging from public housing to 
homelessness to community revitalization. In order to 
effectively serve people in need, HUD obviously must have 
adequate financial systems, as well as resources.
    As CFO, Ms. Antonelli, I hope you will work to ensure that 
HUD has the resources it needs to run its programs.
    We have expressed some disappointment in this year's HUD 
budget and hope that HUD fights for additional resources next 
year, and I am sure we will be communicating with the Secretary 
and the Department about those issues.
    We have Senators here to introduce the nominees and I am 
going to turn to them.
    Senator Nickles, we will turn to you to introduce Mr. 
Rosenfeld and then we will turn to Senator Allen to introduce 
Ms. Antonelli.

                STATEMENT OF SENATOR DON NICKLES

    Senator Nickles. Mr. Chairman, thank you very much.
    I am delighted to be with you and Senator Stabenow to 
introduce to the Committee my friend, Ron Rosenfeld, for the 
position to be President of Ginnie Mae.
    I have had the pleasure of knowing Ron Rosenfeld and his 
wife Patty for the last 10 years. I got to know him when he 
worked in the Bush Administration at the Department of Housing. 
He worked in that capacity and two or three different 
capacities, as well as the Department of Treasury. He did an 
outstanding job in that Administration.
    Then I had the pleasure of getting to know Ron even better 
when for the last few years he served as Secretary of Commerce 
for my State, the State of Oklahoma, and did a fantastic job 
for Governor Keating and did a fantastic job for our State.
    As you mentioned, he has enormous experience in real estate 
and finance. He has the background, the expertise, and the 
talent to do an outstanding job as the President of Ginnie Mae.
    I would urge the Committee to move expeditiously on his 
nomination. I thank you for his consideration and I think he 
will be a real complement, not only to the Bush Administration, 
but, frankly, to the country as well.
    Chairman Sarbanes. Thank you very much, Senator Nickles, 
for those kind words.
    I must say that one of the things that leaped out as I 
reviewed Mr. Rosenfeld's biography is how he ended up in 
Oklahoma. But we will put that question to him.
    [Laughter.]
    Senator Nickles. That was our gain.
    Chairman Sarbanes. Senator Allen.

                   STATEMENT OF GEORGE ALLEN

           A U.S. SENATOR FROM THE STATE OF VIRGINIA

    Senator Allen. Thank you, Mr. Chairman.
    I appreciate your leadership in having this hearing. It is 
good to see Senator Stabenow as well.
    It is my pleasure to introduce to you a resident of the 
Commonwealth of Virginia, Angela Antonelli, as you stated 
earlier, who has been nominated to be the CFO, Chief Financial 
Officer, for the U.S. Department of Housing and Urban 
Development.
    Angela has a distinguished record of public service and 
background in financial policy and management. You mentioned 
her education. She obviously had a good education and made the 
right decision by moving to the Commonwealth of Virginia in 
Fairfax. So, I guess the Princeton education, Cornell 
education, do make sure that those students learn the good 
places to live and we are glad she chose Virginia.
    In the business of HUD, being a CFO, one would look for 
someone's background and where their experience is in the 
private sector, as well as in the Government sector. And having 
worked at the OMB in the first Bush Presidency, I think will be 
very helpful. The fact that she worked for Lewin-VHI, Inc., 
which is a well respected independent analysis group, as a 
senior consultant, matters.
    Angela has worked as a Presidential Management Intern 
within the GAO and obviously also with the Department of Labor, 
for the U.S. Senate Committee on Labor and Human Resources, and 
the Department of Education in New Jersey. Recently, in the 
last 5 or 6 years, she served as the Director for The Thomas A. 
Roe Institute for Economic Policy Studies at The Heritage 
Foundation.
    She has the qualifications, I submit, Mr. Chairman and 
Members of the Committee, to handle the task, which is a very 
important task--the responsibility for the development of the 
Department's budget, a $30 billion budget, financial 
management, the presentation of accurate financial information, 
management integrity, so that when appropriations are being 
made, we understand that there is credibility to that and 
whatever resources are appropriated are handled in a way that 
is strategically meeting their plans, but also serving the 
customers, the citizens.
    Secretary Martinez has made it his number one priority to 
get HUD's house in order. And clearly, the CFO of HUD will be a 
leading role-player in addressing the weaknesses of the agency 
that have been identified by the General Accounting Office, as 
well as HUD's own Inspector General.
    So, Mr. Chairman and Members of the Committee, it is my 
sincere pleasure to present to you, and support the nomination 
of an individual with integrity, character, and capabilities 
that will serve as CFO of HUD. And Angela Antonelli surely does 
have the experience and the capabilities of getting HUD's house 
in order.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Senator Allen. It 
is very helpful to the Committee to have your comments before 
us. I know you have a busy schedule and we will certainly 
excuse you.
    Now, I see Senator Wyden here. We are going to take Ms. 
Dorn on the second panel. But Ron, you may want to come forward 
and just introduce her right now. Our memories are long enough 
that we will remember it when she comes up on the second panel.

                     STATEMENT OF RON WYDEN

            A U.S. SENATOR FROM THE STATE OF OREGON

    Senator Wyden. Mr. Chairman, thank you very much for your 
thoughtfulness and I will try to enhance Ms. Dorn's candidacy 
with brevity here.
    First, I think that we all remember with great fondness 
Senator Mark Hatfield. That is where I met Jenna Dorn. She was 
on Senator Hatfield's staff for more than 5 years. And to get a 
sense of her appreciation of humor, she just reminded me that 
the first 3 years really did not count because she was too 
green to know what she was doing.
    Chairman Sarbanes. I thought everyone in Oregon was green.
    [Laughter.]
    Senator Wyden. We are. Nicely put. Nicely put.
    [Laughter.]
    But she brings great savvy and expertise to her candidacy 
to head the Federal Transit Administration. In addition to 
working with Senator Hatfield, she was in the Executive Branch. 
She was also with the Red Cross.
    What I like about Jenna so much is that she just embodies 
the approach that you and I and so many have tried to have, and 
that is that she is a problem-solver. She is not an ideologue. 
She is somebody who gets people together of disparate views and 
solves problems. And I think we all know how important 
infrastructure issues are.
    Jenna has been a long-time supporter of our pioneering 
efforts in Oregon with what we call the Banfield Light Rail. I 
think that she understands the needs of rural communities, as 
well as urban communities.
    I would just wrap up by saying that rarely do I think 
somebody is as well qualified as Jenna Dorn for a position like 
this. You see it in her breadth of experience, in her ability 
to work with people, and I am very hopeful that you and our 
colleagues on the Committee will report her out expeditiously.
    Chairman Sarbanes. Thank you very much. We appreciate it.
    Senator Wyden. Thank you.
    Chairman Sarbanes. We have been joined by Senator Stabenow 
and Senator Carper. I would yield to them if they have an 
opening statement that they would like to make.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    I would only say that I appreciate your holding this 
hearing and I want to thank you for your leadership in moving 
ahead on important nominations to fill vacancies. I think it is 
a real credit to you and your leadership that we have started 
the new Committee as quickly as possible. I want to thank you 
for your leadership in doing that and welcome the nominees and 
I look forward to hearing from them.
    Chairman Sarbanes. Senator Carper.

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. I would only add to that, welcome to the 
families of the nominees, some of whom are obviously gathered 
here today. It is a day of family pride, I am sure, and we are 
anxious to begin their confirmation hearing. We welcome you all 
warmly to the hearing.
    I just want to say to those in the room who might have 
actually been part of raising or steering the people who are 
the nominees before us today, thank you for embedding in them 
the kind of values that would lead to public service. And to 
those of you who have gone through the process of filling out 
all the disclosure forms that have enabled you to sit at this 
table today, a special thank you.
    I like to say for people who go through this process, just 
to go through the disclosures alone, for you no purgatory. 
Straight to heaven. So thank you. Welcome.
    [Laughter.]
    Chairman Sarbanes. I want to just comment on something that 
Senator Stabenow said.
    We have been moving ahead with the hearings on the nominees 
because we are anxious to help the Administration put its 
people into place. But the Committee has not yet been fully and 
properly constituted, I regret to say. There has been a hang-up 
on the floor in clearing the resolution.
    So, we are not going to be able to move to the next step, 
which would be the actual business of reporting out the 
nominees and then getting them out to the Senate floor until 
that is resolved. But we are obviously keeping a close eye on 
that and we are trying to line things up as best we can.
    We had originally hoped to markup Mr. Ferguson yesterday, 
for the Federal Reserve Board. In fact, I announced the 
previous week we were going to do that. That was on the 
assumption that the Committee would be fully and properly 
constituted by that time. That did not occur. So, we had to put 
that over. Hopefully, that will happen in the near future and 
we will then move ahead with these various nominees that are 
pending from the Administration.
    I would like to say to the nominees, it is a standard 
procedure of this Committee at the nomination hearings to swear 
in the nominees. Therefore, I would like to ask you both to 
stand and I will proceed to do that now.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Ms. Antonelli. I do.
    Mr. Rosenfeld. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Ms. Antonelli. Yes.
    Mr. Rosenfeld. Yes.
    Chairman Sarbanes. Thank you very much.
    Ms. Antonelli, we always give preference to the Chief 
Financial Officers. So why don't we hear from you first, and 
then we will go to Mr. Rosenfeld. We will hear their opening 
statements, and then we will go to the questions.

         STATEMENT OF ANGELA M. ANTONELLI, OF VIRGINIA

                 TO BE CHIEF FINANCIAL OFFICER

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Ms. Antonelli. Thank you very much.
    Chairman Sarbanes. And if either of you has family here and 
want to introduce them, we certainly invite you to do so.
    Ms. Antonelli. Chairman Sarbanes, distinguished Members of 
the Committee, my name is Angela Antonelli and I would like to 
thank you for inviting me to appear before you today.
    I would also like to thank Senator Allen for his time and 
his kind words of introduction.
    I am truly humbled and honored to be the choice of 
President Bush and Secretary Mel Martinez to serve as the Chief 
Financial Officer for the U.S. Department of Housing and Urban 
Development. If confirmed, I look forward to being part of the 
outstanding team at HUD that will work with you and your staffs 
to address the housing and economic development needs in our 
Nation's communities.
    As the daughter of Italian immigrants, I cannot fully 
convey to you what it means for me to be here today. A day like 
today fills me with gratitude and love for this country and the 
freedom and opportunity that it provides. But you cannot begin 
to imagine what it means to my mother, Anna Savini, who is here 
with me today.
    She is sitting right behind me.
    To her, I am the reason she came to the United States and 
sacrificed so much and started all over. Also, my husband 
Michael, who is also sitting behind me, is here with me today.
    When I told her I was asked by the President to serve, she 
simply said, ``It is the Dream.'' If you are born poor, you do 
not have to remain poor; your life's work preordained. No, in 
the United States--a land where freedom and opportunity 
flourish--you can dream and through hard work and strength of 
character achieve those dreams. My career in public service is 
based on a sincere desire to make sure that future generations 
always see the United States as a land where freedom and 
opportunity flourish and dreams for a better life can come 
true.
    An important part of the American Dream is a home to call 
your own and a community of caring people of which you can be a 
part. I look forward to being a part of HUD's mission to 
preserve the Dream--to empower communities and their residents 
to improve themselves by reducing homelessness, creating 
opportunities for homeownership, and encouraging economic 
development.
    As Secretary Martinez has stated repeatedly, the first 
priority will be to put HUD's own house in order. The CFO has 
responsibility for the development of the Department's budget 
and for financial management, the presentation of accurate 
financial information, management integrity and departmental 
strategic planning. If confirmed as CFO, I intend to work 
closely with my colleagues at HUD to address the institutional 
weaknesses identified by the U.S. General Accounting Office and 
HUD's Inspector General. These weaknesses diminish the ability 
of the Department to achieve its mission.
    To the position of Chief Financial Officer, I bring 15 
years of policy, budget and management experience. I have 
worked with and for many of the organizations I will be working 
closely with to carry out my responsibilities as CFO, including 
Congress, the GAO and the Office of Management and Budget. I 
will be able to bring my experiences working for the Federal 
Government and State government, as well as the private and 
nonprofit sectors, to contribute to the effective management 
and leadership of HUD.
    Congress and the public are aware of the problems that have 
plagued HUD. Although GAO has removed the Department as a whole 
from its ``high-risk'' list, there are still many activities 
that remain at risk. Under the leadership of Secretary Mel 
Martinez, I look forward to working with Congress in a 
bipartisan manner to address these issues, restore credibility, 
and do a better job with the tax dollars that hard-working 
Americans trust to us.
    I am deeply grateful for the confidence President Bush and 
Secretary Martinez have placed in me. I take the 
responsibilities and the challenges ahead very seriously.
    Mr. Chairman and Members of the Committee, thank you for 
your consideration of my nomination and the opportunity to 
appear before you today. I would be pleased to answer any 
questions that you may have.
    Thank you very much.
    Chairman Sarbanes. Thank you very much, Ms. Antonelli.
    Mr. Rosenfeld.

         STATEMENT OF RONALD A. ROSENFELD, OF OKLAHOMA

              TO BE PRESIDENT, GOVERNMENT NATIONAL

               MORTGAGE ASSOCIATION (GINNIE MAE)

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Rosenfeld. Mr. Chairman, first, I would like to 
introduce my wife Patty, who is sitting right behind me. Patty, 
would you stand up, please?
    I would also like to thank Senator Nickles for his kind 
words of introduction.
    Mr. Chairman and distinguished Members of the Committee, 
thank you for the opportunity to appear before you today. I 
would also like to express my deep appreciation to President 
George W. Bush for his confidence in me, as evidenced by his 
nominating me to be the President of Ginnie Mae, the Government 
National Mortgage Association. In addition, I would like to 
indicate my gratitude to Secretary Mel Martinez for selecting 
me to serve in a strategic position on his team.
    Upon learning of the President's intent to nominate me, I 
called my father, who is 92 years old, to share the good news. 
His response was, ``Not bad for an immigrant's son.'' If the 
truth be known, he was an illegal immigrant who managed to 
elude our immigration officers for a few years, but was 
ultimately caught and deported. His incredible good fortune was 
that he was deported to Canada rather than to Eastern Europe 
from where he came. He subsequently met my mother, who had 
legally immigrated from Eastern Europe, and they were married 
in 1935. At the time of their marriage they had a net worth of 
$100. The success of our family cannot be explained by 
``compound interest.'' But rather, that success is attributable 
to hard work, opportunity, and giving their only child the 
educational opportunities they never had.
    The story of my family is wonderful, but it is not unique. 
With slight variations, it is the story of the Martinez family, 
the Jackson family, and the Bernardi family. Each of these 
family names is now preceded by the title of Secretary, Deputy 
Secretary, and Assistant Secretary. These people, together with 
John Weicher, Dick Hauser, and myself, if confirmed, and others 
yet to be selected, will be the people to whom President George 
W. Bush has entrusted the leadership of the Department of 
Housing and Urban Development. Only in America!
    I am honored to be chosen by President George W. Bush and 
Secretary Martinez to be the President of Ginnie Mae. If I am 
confirmed, I will strive with all my energies and abilities to 
meet their every expectation. I am sure that like most every 
other Presidential appointee who has appeared before this 
distinguished body, I never dreamed of having the privilege of 
serving our country in this way. But having said that, I 
believe I bring to this opportunity a background and a level of 
experience that is most appropriate.
    Upon graduating from law school, I chose not to practice 
law but rather, to become an undercapitalized homebuilder. 
Actually, being undercapitalized was not a choice but just a 
reality. There is simply no better way to learn about the 
importance of credit than by not having it, and there is no 
better way to understand the significance of the continuity of 
credit than by having your customers not be able to purchase 
your product.
    After 15 years in the real estate development business, 
which had expanded into multifamily and commercial development, 
I became a partner in a regional investment banking firm. This 
was my introduction to capital markets and to the world of Wall 
Street.
    With the backdrop of the oil bust and the savings and loan 
crisis, I joined HUD in 1989, as Deputy Assistant Secretary for 
Single Family Housing. This historically obscure post had the 
challenge of disposing of 70,000 single-family foreclosed 
houses--a daunting task in traumatic times. I then moved on to 
become the General Deputy Assistant Secretary of Housing--FHA 
Commissioner.
    Subsequent to that, I was asked to represent the 
Administration in its relations with the real estate industry 
while serving at the Department of the Treasury. Throughout 
this entire period, markets were not functioning and our real 
estate credit system was in shambles. Fortunately, time and 
prudent stewardship have a way of resolving problems and after 
a few years, order was restored.
    Thereafter, my wife and I went to Oklahoma to help a friend 
who had just been elected governor. We intended to stay about 4 
months and we actually wound up staying 4 years as a result of 
the Oklahoma City bombing. After that horrific event, Governor 
Keating asked if I would help him enhance the economic 
viability of the State as the Secretary of Commerce. In that 
capacity, I learned about the challenges of living in small 
towns, rural areas, and underserved markets.
    One might reasonably ask--what does that background and 
those experiences have to do with Ginnie Mae? The answer is 
everything. Ginnie Mae's mission is to help provide affordable 
homeownership opportunities for all Americans by facilitating 
efficient secondary market activities for Federally issued or 
guaranteed mortgages, thus linking the capital and Federal 
housing markets. In somewhat clearer terms, Ginnie Mae is about 
credit, capital, and providing resources to underserved areas.
    Historically, Ginnie Mae has been a very well-run 
organization. As President, I will be guided by the old medical 
adage, ``Do No Harm,'' as well as my own desire to do good. 
Most of us in this chamber know the thrill and the significance 
of owning our first home yet there are many Americans who have 
not yet had that experience. They deserve a chance and it is 
the role of Ginnie Mae to help make that possible.
    Secretary Martinez has made it a cornerstone of his 
administration to expand homeownership for low- and moderate-
income families. I believe that Ginnie Mae, together with its 
partners in the private sector, as well as FHA, the Veterans 
Administration, and the Rural Housing Service, can do exactly 
that. I welcome the chance to be a participant in this very 
worthwhile endeavor.
    Thank you for your consideration.
    Chairman Sarbanes. I thank both of you for very thoughtful 
statements.
    Senator Allard is with us and I yield to him if he wants to 
make a statement at the outset before we go to questions.

                COMMENTS OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman.
    I have an opening statement I want to submit for the 
record.
    Chairman Sarbanes. It will certainly be included in the 
record.
    First of all, let me say that both of your statements 
resonated with me since I am also the child of immigrant 
parents. Otherwise, I am not sure that I would be entitled to 
preside at this hearing here today.
    [Laughter.]
    Ms. Antonelli, let me put a couple of questions to you 
first.
    In 1998, you wrote an article--actually, you have written 
quite a number of articles--in which you stated that HUD had 
problems with management, waste, and abuse.
    As I think you all probably know, HUD has made significant 
progress in overcoming the problems of its past. In 1999, the 
GAO reported that HUD had made credible progress in overhauling 
its operations under the HUD 2020 Management Reform Plan 
implemented by then-Secretary Cuomo. Two years later, GAO found 
that HUD had continued to make progress in addressing these 
problems and at that time, GAO took HUD off its list of high-
risk agencies.
    One area that the GAO found marked improvements in was its 
information and financial management systems. They reported: 
``HUD has taken actions to improve and strengthen the 
selection, control and evaluation of information technology 
projects. In addition, HUD has reduced the number of financial 
management systems that are not in compliance with Federal 
regulations.''
    In October of last year, GAO found that HUD's strategy 
should help HUD continue to make progress in resolving its 
remaining material weaknesses.
    Now these reports do not suggest that there are not still 
problems and we recognize that there are still problems. But it 
does appear that HUD is on the right track in improving its 
management and its systems.
    As the CFO, you will oversee many of the systems that the 
GAO report addressed. What is your intention with respect to 
following the General Accounting Office's recommendations in 
continuing with the HUD 2020 Management Reform Plan that are 
helping to strengthen the Department?
    Ms. Antonelli. Senator, addressing the remaining management 
weaknesses that have been identified by the U.S. General 
Accounting Office is a top priority for Secretary Martinez and 
it is a top priority for me if confirmed as CFO.
    There has been a tremendous amount of progress and I know 
that in the short time that I have been meeting with the team 
at HUD, there are a lot of outstanding people who have been 
doing tremendous work to significantly improve the quality of 
the financial systems that exist at the Department.
    It is true that GAO has removed the Department as a whole 
from the high-risk list. But as you know, there are still a 
number of activities that remain at risk. Those material 
weaknesses will again remain a high priority. We will continue 
to track the recommendations of the General Accounting Office 
and of HUD's Inspector General.
    Again, in this Administration, and under Secretary 
Martinez, it is among the highest priorities to continue to 
address the remaining weaknesses.
    Chairman Sarbanes. My time is running down here. I am going 
to yield here in a moment to Senator Allard.
    Let me put a question to you, Mr. Rosenfeld. Later, I will 
come back. I have some other follow-up questions that I want to 
ask Ms. Antonelli.
    First, let me just note for the record your extensive 
experience in the housing and finance field in general, and the 
time you spent at HUD in particular. You have really held 
nearly every position at the Federal Housing Administration, 
aside from Commissioner--Deputy Assistant Secretary for Single 
Family Housing, Acting Deputy Assistant Secretary for 
Multifamily Housing, and the Acting General Deputy.
    I think given the close relationship of Ginnie Mae to FHA, 
this kind of intimate knowledge that you gained from your 
previous service at HUD should certainly help you in carrying 
forward your responsibilities in this position.
    You state in your questionnaire talking about the late 
1980's and early 1990's: ``During a period of significant 
decline in real estate values, many private sector participants 
in the mortgage business decided, quite appropriately from 
their standpoint, not to continue their primary business 
activity. This created a downward spiral in values and further 
exacerbated the problem. During this entire period, Ginnie Mae 
conducted business as usual and was a strong barricade against 
even greater credit problems.''
    Am I to draw from this statement belief on your part that 
there is a strong role for Ginnie Mae to play in the 
marketplace?
    Mr. Rosenfeld. Mr. Chairman, I believe there is. I believe 
that a lender of last resort is an imperative phenomenon in our 
credit system. And I think that, certainly in the area of 
housing, the Government housing program, as well as Ginnie Mae, 
serve that role, which is very significant.
    I remember as a young man not being able to believe the 
stories of the Depression in terms of how values could decline.
    Quite frankly, it has been an enormously educational 
experience, not necessarily a pleasant one, but certainly 
educational, to be a participant in the credit problems in the 
late 1980's and the early 1990's. It certainly has enhanced my 
belief that a lender of last resort is a critical component of 
our economic system.
    Chairman Sarbanes. Thank you.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I want to first recognize the statements where both of you 
indicated that you came from very humble roots. I think that 
speaks loads for freedom. It speaks a lot for what we have here 
in America, and obviously, both of you hold that very dear. It 
is good to hear that refreshing type of testimony.
    Ms. Antonelli, I want to follow up a little on the material 
weaknesses and internal controls that were alluded to by the 
Chairman. Do you have plans to shore up some of these internal 
controls?
    Ms. Antonelli. Senator Allard, absolutely. At this point, I 
have been briefed on a number of these issues and I am learning 
about these issues. But, clearly, there are several management 
challenges that the Department does continue to face. Some of 
these challenges include issues relating to trying to reduce 
subsidy overpayments, improve the utilization of funds, and 
generally make sure that the financial systems that are in 
place are complying with statutory standards that have been 
established. And also, to just make sure that staff resources 
are allocated effectively, not only within the Chief Financial 
Officer's office, but also throughout the Department.
    So, I will, again, if confirmed as CFO, be working very 
closely with the senior team at HUD, as well as the outstanding 
staff in the Chief Financial Officer's office to address many 
of these management weaknesses that exist. And the types that I 
just described are some that most directly affect the 
responsibilities of the Chief Financial Officer.
    Senator Allard. Congress passed the General Results and 
Performance Act and I hope that you can follow wherever we 
asked that we set up specific objectives within the departments 
and then measure results in measurable terms. I believe you 
have had some experience with that type of management approach. 
Would you comment further on that?
    Ms. Antonelli. The Government Performance and Results Act, 
which was passed in 1993, the implementation began in 1997, and 
so we are about 4 years into the implementation, I think the 
concept of asking a very fundamental question about the extent 
to which Federal programs are producing results and holding 
them accountable for producing results is a very reasonable 
thing to do.
    The Department of Housing and Urban Development has a 
strategic plan, like all agencies do, under the requirements of 
the Act, and an annual performance plan that they issue.
    This is something that again, in my role as CFO, if 
confirmed, I will be reviewing the strategic plan and the 
performance plan, and in the context of the budget development 
process, continuing the efforts to link more closely the budget 
and funding to performance and identifying effective 
performance measures and ways that we can effectively measure 
performance and report on that in the context of our annual 
budgets.
    Senator Allard. Now the General Accounting Office has found 
that HUD has enormous unspent balances. More than $108 billion 
remain unspent.
    Ms. Antonelli. Right.
    Senator Allard. Of that amount, more than $12 billion is 
not even allocated. What do you plan to do to reverse this 
trend?
    Ms. Antonelli. Well, at this point, you are absolutely 
right. The unspent balance issue is a significant one. It does 
constitute a significant amount of money. Some of those unspent 
balances are long-standing issues. And these are weaknesses 
that have been identified by GAO, IG, and others. It definitely 
is a priority of the Secretary, as I understand it, to address 
the issue of the unexpended balances.
    Currently, my understanding is that the Department is in 
the process of reviewing specific programs that have these 
types of unexpended balances to better understand why they 
exist and what, in fact, can be done under existing law and 
regulation to perhaps address this problem, make sure the funds 
can be more effectively allocated to serve people who currently 
cannot be served for a variety of reasons, including this 
particular problem.
    Obviously, to the extent this problem exists, it to some 
degree does undermine the credibility in terms of budget 
justifications to ask perhaps in some cases for increases of 
funds for programs where these types of unexpended balances 
remain a problem. It is a material weakness. It is a problem 
that is considered very serious and it is a priority of the 
Secretary's to address it. And as CFO, I would certainly do 
everything to be able to support that effort.
    Senator Allard. Mr. Chairman, I see my time is coming to a 
close here. I have a couple more questions for Mr. Rosenfeld. 
Will there be another opportunity to ask questions?
    Chairman Sarbanes. Yes, we are going to do another round.
    Senator Allard. Very good. Thank you.
    Chairman Sarbanes. Senator Reed, I notice that Senator 
Smith has come, and I know he wants to make a statement of 
introduction for Ms. Dorn, who is on the next panel.
    Gordon, why don't you come on up and do that now. I know 
you have other engagements.

                   STATEMENT OF GORDON SMITH

            A U.S. SENATOR FROM THE STATE OF OREGON

    Senator Smith. Thank you, Mr. Chairman. I appreciate that 
courtesy. I am helping Joe Biden with all these nominations 
down in Foreign Relations and we miss your presence there, but 
know you are Chairing this great Committee as well.
    Mr. Chairman, colleagues of the Banking Committee, I regard 
it as a high privilege and pleasure to be here to introduce a 
friend and a fellow Oregonian, Jenna Dorn, whom President Bush 
has nominated to be the head of the Federal Transit 
Administration.
    She is joined by her two wonderful sons, Ben and Jon.
    Chairman Sarbanes. It is a excuse to get out of school. Or 
is school over for those guys?
    [Laughter.]
    Senator Smith. I know Ben and Jon very well and they look 
for that excuse, I think.
    Chairman Sarbanes. Yes.
    [Laughter.]
    Senator Smith. Jenna and I share something in common. She 
began her career working for Mark Hatfield. Like her, I have 
learned abundantly from Mark Hatfield and am given the 
privilege of trying to fill his place in the U.S. Senate. Both 
of us maintain a strong commitment to his ideals and friendship 
with him.
    But Jenna has since that time broadened her professional 
experience in remarkable ways. She has served in the Government 
as an Associate Deputy Secretary of the U.S. Department of 
Transportation under President Reagan and Assistant Secretary 
for Policy for the U.S. Department of Labor under President 
Bush. After that, she worked with Elizabeth Dole at the 
American Red Cross as its Senior Vice President, and then as 
President of The National Health Museum. So, she has served 
with distinction wherever she has gone. And she has a broad 
knowledge of Capitol Hill that will serve the country, the 
Administration, and the Congress well.
    I have no reservation in heartily recommending her to you 
and to encourage that she be passed to the floor and confirmed 
in this responsibility.
    So it is with pride and appreciation that I am here in her 
behalf.
    Mr. Chairman, I thank you for your courtesy.
    Chairman Sarbanes. Thank you very much, Senator Smith. We 
appreciate your coming and we certainly value the kind remarks 
you have made about Ms. Dorn.
    Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman.
    Let me welcome the nominees. I have had the chance to meet 
with them. They are extraordinarily talented, experienced, and 
patriotic, and we thank them for their willingness to serve.
    Mr. Rosenfeld, if I can jump right into the details of your 
job. But given your experience previously with FHA, you bring a 
lot of perspective to your proposed job at Ginnie Mae.
    The President's budget for fiscal year 2002 will call for 
an increase in premiums for FHA multifamily insurance. This 
increase will raise the cost of using the program, reduce 
affordability and may, in fact, preempt some projects which 
would be deemed economically infeasible.
    In general, the new FHA apartments are affordable to 
working people at about 100 percent of median income. I wonder 
if you have any thoughts on this proposal.
    Mr. Rosenfeld. Well, quite frankly, Senator Reed, my 
reaction to the proposal relates to its effect on Ginnie Mae. 
And if I am confirmed, that will, of course, become an issue 
that will be relevant to me. My sense is that to the extent 
that apartment construction is decreased, that would suggest 
there will be less securitization by Ginnie Mae of those kinds 
of insured loans.
    But I am sure the President has his reasons and the 
Secretary. So, I would defer the policy issue in the 
consideration of that to the President and the Secretary.
    Senator Reed. But as the head of Ginnie Mae, you have at 
least the opportunity to try to react to that policy and still 
continue to fund multifamily developments that will reach 
moderate-income Americans. Would you try to respond in an 
affirmative way to continue the construction of these projects?
    Mr. Rosenfeld. If I were asked, and I indicate that I have 
not been asked at this point, but if I were asked, I am clearly 
in favor of enhancing opportunities to create apartments for 
low- and moderate-income people.
    However, I also understand the significance of running a 
prudent enterprise in a fiscally responsible manner. And to the 
extent that premiums need to be raised to ensure the fiscal 
responsibility of an enterprise, that may have to occur.
    Senator Reed. Thank you, Mr. Rosenfeld.
    Ms. Antonelli, the budget that is being presented for HUD 
this year has, in my view, some critical gaps. There is a 25 
percent cut to the Public Housing Capital Fund, termination of 
both the Public Housing Drug Elimination Program and the Rural 
Housing and Economic Development Program. This inhibits HUD's 
ability to perform its work and significantly inhibits the 
quality of life of many residents of HUD projects. You will 
have a critical role as the CFO. Can you give us some 
assurances that you will try to reverse these cuts and try to 
provide for adequate funding for some of the core programs at 
HUD?
    Ms. Antonelli. Senator, obviously this budget proposal that 
has been put forward by the Department, I have not been 
involved in a significant way. But I will emphasize to you 
that, if confirmed as CFO, I will uphold the policies of the 
President of the United States, President George Bush, and 
Secretary Mel Martinez, in the context of the development of 
the budget each year.
    These are the proposals that have been put forward and we 
look forward, the team at HUD, as we go through the 
finalization of this year's appropriation process and the 
budget process each and every year, to work very closely with 
you and the other Members of Congress and your staffs to engage 
in a dialogue on these types of programs and come to agreement, 
hopefully at the end of the day, about what are the right 
things for the Department of Housing and Urban Development to 
be doing and what are the most important priorities.
    But certainly I support the President and I support 
Secretary Martinez. But as a team, we will work closely with 
Congress on these types of budget issues.
    Senator Reed. I guess we all assume, appropriately so, that 
once a decision has been made, that of course you will be 
supportive of the leadership. But within the context of forming 
those decisions, you will have a very critical voice. And one 
would hope that you would look carefully at these programs and 
advocate strenuously for programs that you believe are 
important which might otherwise, for reasons unrelated to the 
needs of clients of HUD, be sacrificed. I would hope that you 
do that.
    Ms. Antonelli. I will do the best I can. Thank you.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Sarbanes. I would like to follow up on the very 
question Senator Reed was asking because I think it is 
important.
    Looking over your writings, I don't think it would be 
unreasonable for one to have some concern that you would seek 
to cut the HUD programs, that you would come in with a mindset 
toward reducing these programs.
    I am really prompted in part by something Senator Wyden 
said about Ms. Dorn when he said that she was a problem-solver, 
not an ideologue. And I would like to pursue that very point 
with you.
    How fixed are you in your own view, not now, coming within 
the cocoon of the President or the Secretary's decision, how 
fixed are you in your own view about these HUD programs?
    HUD has been given a mission and needs resources to carry 
out that mission. How do you square that?
    Ms. Antonelli. Well, Senator, in the context of the work 
and the research that I have done, and previous positions that 
I have held, I would like to suggest to you that while some 
might be considered to be, and one might be considered an 
ideologue, I would argue that in many respects, much of the 
work that I have done is, in fact, with very much the intention 
of stimulating a public policy debate, in an attempt to try to 
help solve problems, to identify problems and to solve 
problems.
    So in the context of HUD's programs, I will not present 
myself as a detailed expert on these programs. But I certainly 
believe in looking at these programs very carefully and 
assessing.
    Secretary Martinez has said on numerous occasions that HUD 
consists of several hundred programs. We should look at those 
programs. We should look at each and every one of them very 
carefully and make sure that we are accomplishing effectively 
HUD's core mission. And to the extent that there are areas 
where there is duplication or inefficiencies, that we could 
work better with other agencies to deliver services more 
effectively, and that consolidation can occur.
    I think one should be open to the possibility that things 
can be done more efficiently, more effectively, and that in 
some cases big is not always better and more is not always 
better.
    You can do a better job by taking what you have and trying 
to, again, make it work more efficiently and effectively.
    Chairman Sarbanes. Well, now, you have written two 
executive summaries, one entitled, ``Five Good Reasons to Close 
Down the Department of Commerce,'' and another one called, 
``Five Reasons to Pull the Plug on the Department of Energy.'' 
I gather you like to think in terms of five.
    [Laughter.]
    Senator Reed. She should be in the Defense Department, 
then, the Pentagon.
    [Laughter.]
    Chairman Sarbanes. Now, fortunately for you, this did not 
get to the Department of Housing and Urban Development, I 
guess.
    [Laughter.]
    So you do not find yourself in the awkward position which 
our former colleague, Senator Spencer Abraham's found himself 
when he was nominated to be the Secretary of the Department of 
Energy, since he had earlier, while he was here on the Hill, 
called for the abolition of the Department of Energy.
    That all seems to have faded from his mind now, I might 
note.
    [Laughter.]
    But this again leads me to put the question perhaps in a 
different way, whether you come into this job with a kind of 
mission in your own mind to reduce the Department. I want to 
distinguish that from trying to gain efficiencies, to eliminate 
this waste and mismanagement to which you referred back in 1988 
and to which I made reference, and with which we have all been 
struggling and trying to do.
    I am trying to get some sense of what your mission is and 
how open you are in your thinking, how practical and pragmatic 
you are going to be in your thinking as you approach these 
problems.
    Ms. Antonelli. Senator, I can assure you that I am very 
open-minded and willing to consider all perspectives and I 
think I do in the context of the work that I have done.
    In both of those pieces that you cited, much of what is 
discussed in those pieces really highlight many of the concerns 
at the time that piece was written, at the early stages of the 
implementation of the Results Act, the departments' strategic 
plans, their first annual performance plans, which were rated 
by Congress to be extremely poor.
    There was also legislative proposals from, I believe, the 
House Budget Committee, Chairman John Kasich, to look at 
perhaps closing down these departments.
    But in the context of what was written there, much of what 
is encompassed in those papers really reflect very harsh 
criticisms that have been put forward on numerous occasions by 
many oversight departments like GAO or by the departments' own 
Inspector General, expressing serious concerns about continued 
wasteful spending and management deficiencies, inability to 
determine whether or not results are being achieved for the 
money that is being spent in those departments.
    These pieces were meant to, again, contribute to the debate 
that was being held at the time and I think still continues 
today and is embodied in a statute like the Government 
Performance and Results Act that we need to take a critical 
look at these programs and in all honesty assess really whether 
they are working, as well as they should and what are the 
options to try to improve these programs or address these 
problems.
    And look not only within an agency, but also across the 
entire Government, to the extent that there is significant 
duplication and overlap of programs across departments, to 
evaluate whether there are opportunities for consolidation.
    In the conclusion of my Department of Commerce paper, I 
state very clearly that while one might think about a situation 
where there would not be a Department of Commerce, that in and 
of itself does not suggest that every program within Commerce 
is not worthwhile. It simply suggests that maybe there is some 
restructuring that one might want to consider and there are 
programs within that Department that are very valuable, that 
are certainly justifiable, and should be funded.
    It is just a question of how Government ultimately is going 
to be organized most effectively to deliver those services.
    Chairman Sarbanes. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    Well, I hope, Mr. Chairman, we have not gotten to the point 
where if we advocate anything other than bigger bureaucracy and 
more power in Washington, somehow we are an ideologue.
    I think that we need to continue to look at these programs 
and make sure the taxpayer dollars are being well spent and 
that whoever the clients are for those programs are being well 
served.
    I hope that we continue to search out ways in which we 
continually can improve the programs so that they do a better 
job of serving those clientele. And if there is a way to save 
taxpayer dollars in doing that, I hope that we seek out those 
solutions.
    Mr. Rosenfeld, during your tenure in this appointed 
position, I think there needs to be some key performance goals 
on what you want to accomplish. How will the Congress know 
whether or not you have accomplished them?
    Mr. Rosenfeld. Senator Allard, in the case of Ginnie Mae, 
the performance goals that may exist or that we may establish 
are relatively easy to determine because they are almost 
numerical in nature. We operate--I should say, if I am 
confirmed, we will operate an enterprise that has a relatively 
small product line. Namely, the securitization of Federally 
insured mortgages.
    We hope to, again, if confirmed, look at other 
opportunities to perhaps modestly expand that product line if, 
in fact, it is prudent and can be done in a business-like 
fashion, and will, in fact, become a significant benefit to the 
public.
    I think that--again, if confirmed--we will set forth the 
goals that we have and they will be pretty transparent because 
there is really no way to hide from the numbers.
    Senator Allard. Unlike Fannie Mae and Freddie Mac, Ginnie 
Mae securities are backed by the full faith and credit of the 
U.S. Government. I think this represents, at least potentially, 
an enormous liability to the taxpayers. As President of Ginnie 
Mae, what would you do to help safeguard the taxpayer dollars?
    Mr. Rosenfeld. Well, as Ginnie Mae is currently structured, 
the risk component of our enterprise I think is well managed in 
that about 80 percent of the business that Ginnie Mae does is 
FHA-insured and in that category, the risk for Ginnie Mae is 
very, very slight, perhaps 1 percent. About 20 percent of our 
business is related to the VA programs. And there, we do have 
somewhat greater risk in the way of catastrophic decline in 
housing prices.
    I think the important thing, in response to your question, 
is that we continue to be cognizant of the fact that the 
granting of the full faith and credit as a credit enhancement 
to any indebtedness is an enormously serious matter and should 
be guarded with great zeal.
    I recall the past where we in this country guaranteed 
deposits in savings and loans. One need only live through that 
experience to realize the significance of a full faith and 
credit guarantee on an indebtedness.
    Let me assure you, Senator, that I will treat with the 
utmost degree of seriousness, if confirmed, the extension of 
any sort of guarantee of full faith and credit.
    Senator Allard. Mr. Chairman, I am finished. Thank you.
    Chairman Sarbanes. Thank you, Senator Allard.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Mr. Rosenfeld, the previous Administration initiated a 
targeted lending initiative which gives a price break of up to 
50 percent on Ginnie Mae's guarantee fee on home loans made in 
central cities, empowerment zones, enterprise communities, 
Indian lands, and other underserved areas. It has resulted in 
$15.5 billion in securities, representing over 160,000 
mortgages.
    I wonder if you are committed to continuing this effort in 
a very particular sense, and also in a broader sense, increased 
efforts to ensure that in these areas, central cities, minority 
neighborhoods, et cetera, that there is more homeownership.
    Mr. Rosenfeld. Senator Reed, let me assure you that we have 
every expectation of continuing the targeted lending program. 
To the extent we can enhance it and improve it in a prudent 
manner, we would intend to do so.
    Senator Reed. Thank you very much.
    Ms. Antonelli, let me just go back to the context of the 
questions that were posed by Senator Sarbanes and just ask 
specifically, what do you believe the mission of HUD is?
    Ms. Antonelli. I believe that the mission of the Department 
is to make the lives of Americans better. What does that more 
specifically mean? That means to increase homeownership, which 
I very strongly believe is such a critical part of the American 
Dream. As I said in my statement, reducing homelessness and 
really empowering communities to enhance their economic 
development.
    Senator Reed. Do you believe that HUD is achieving that 
mission today?
    Ms. Antonelli. I think that there are a lot of very good 
things that HUD programs accomplish to make people's lives 
better.
    If it is wrong of me, I am frustrated where I see that 
programs that we have in place are not working the way they 
should be working and that there is money that hard-working 
Americans give to us in terms of their tax dollars that is not 
being spent to help improve people's lives. There are a lot of 
people who are eligible for services that today are not 
receiving services. And we need to understand why that is 
happening.
    I would suggest that there are certainly problems, the 
nature of those material weaknesses have been highlighted and 
have existed for some time with HUD programs that we need to 
become very serious about addressing and making sure that we 
understand why programs are not working and how we can make 
them better and to make them better and to make sure, if 
confirmed as CFO, that we are doing the best job we can 
providing information to policymakers within the 
Administration, but also, very importantly, to Members of 
Congress to be able to understand what is happening with these 
programs, if they are achieving their intended objectives, and 
if they are not, what do we have to do about it?
    I think there are problems that exist. And everything that 
has motivated me in terms of my career in public service is 
very much driven by a desire to make people's lives better, 
that they can achieve the American Dream. I am frustrated when 
I don't see that happening.
    Senator Reed. Assuming that you can work out these 
identified management problems, can HUD achieve its stated 
mission with the resources it has today?
    Ms. Antonelli. Senator, there is still a lot that I will 
need to do in terms of getting in-depth into many of these 
programs. So it would be hard for me to say exactly to you what 
is an appropriate HUD budget.
    But rather than the amount of the budget, I think, again, 
in the context of being results-oriented, are we accomplishing 
HUD's mission? Are we doing those things? Are we reducing 
homelessness? Are we increasing homeownership and helping 
people achieve the American Dream? Are our communities 
prospering? To me, if we are able to achieve those types of 
results and measure that concretely, then at the end of the 
day, that is what is most important.
    And I cannot tell you what right amount of money should 
reflect it. It might be more than what the current budget is. 
It might be exactly what it is today. It might be something 
less. I cannot answer that for you right now.
    Senator Reed. It seems, though, that your response suggests 
that you are very clear that management issues have to be 
addressed. You are very clear that information issues have to 
be addressed. But you have formed no conclusion, assuming you 
accomplish those things, whether the present resources and 
projected resources of HUD can deal with the mission, which is, 
as you put out, making the lives of all Americans better.
    That is a pretty broad mission if that is the mission. And 
I guess my instincts are that, and I commend you and wish you 
well in fixing the management, it has to be done, but even a 
perfectly organized and efficient system to put every American 
in a safe and decent home, is going to require some more 
resources.
    Thank you.
    Chairman Sarbanes. We want to draw this panel to a close so 
that we can go on to our next nominee.
    Ms. Antonelli, the Committee is still waiting for answers 
to written questions sent to the Department from the budget 
hearing, the oversight hearing that Senator Allard held a while 
back. Could you ask the Department to get those answers to the 
Committee? We think enough time has intervened that we should 
have responses by now.
    Mr. Rosenfeld, we appreciate your coming before us today 
and we appreciate your willingness to come back into Government 
and to bring your experience to bear on some of these problems.
    Ms. Antonelli, I think the best way to close with you would 
be simply to ask you to read to us again the last paragraph on 
the first page of your prepared testimony. Do you still have it 
there in front of you, the statement you gave at the outset?
    Ms. Antonelli. I am sorry. Which paragraph, Senator?
    Chairman Sarbanes. The last paragraph on the first page.
    Ms. Antonelli. On the first page. As the daughter?
    Chairman Sarbanes. No, no, last paragraph. It is the one 
that begins: ``An important part.''
    Ms. Antonelli. An important part of the American Dream is a 
home to call your own and a community of caring people of which 
you can be a part. I look forward to being a part of HUD's 
mission to preserve the American Dream--to empower communities 
and their residents to improve themselves by reducing 
homelessness, creating opportunities for homeownership, and 
encouraging economic development.
    Chairman Sarbanes. Let me say that I am taken by that 
paragraph. And as you are going to move ahead here in this 
process, let me say that that statement on your part given to 
us in your opening testimony, weighs heavily with me and we 
hope as time progresses we will be able to work together in 
order to implement those objectives.
    We thank you very much for being here. We are honored that 
your mother was able to be present with us, and your husband. 
Mr. Rosenfeld, we are delighted your wife was present with us 
today.
    We will now adjourn this panel and move on to the next one. 
Thank you all very much.
    Ms. Antonelli. Thank you, Senator.
    [Pause.]
    Chairman Sarbanes. We will now turn to our third nominee 
this morning, Jennifer Dorn, who is being considered for the 
position of Federal Transit Administrator. I want to welcome 
her before the Committee this morning. We look forward to 
working closely with her in her new position, as I believe that 
transit is a vital component of our national transportation 
infrastructure.
    We very much appreciate the two Oregon Senators coming this 
morning to introduce her.
    I am pleased to observe that America's transit systems have 
experienced tremendous growth in recent years. The Washington 
Post recently ran a story entitled, ``Mass Transit Rules The 
Roads''--this was just in April--which noted that Americans 
took over 9.4 billion trips in transit in the year 2000, the 
highest level in 40 years.
    In fact, transit ridership has increased by 21 percent over 
the past 5 years, growing faster than the U.S. population, 4.8 
percent, faster than highway use, 11 percent, faster even than 
domestic air travel, 19 percent.
    However, this success brings new challenges. Communities 
across the country are realizing that transit offers a solution 
to many of the difficult problems facing them--moving people 
from welfare to work, alleviating congestion, reducing energy 
consumption, and safeguarding the environment. These 
communities are looking to the Federal Government for 
assistance in getting their transit systems started. These are 
communities that want to come into transit.
    At the same time, we must protect the existing Federal 
investment in transit by ensuring adequate support for cities 
and States that are already running successful systems.
    Many existing systems are reaching their capacity, as 
ridership has grown far beyond what the systems were originally 
designed to handle. This capacity crisis will become a 
significant problem on even more of the Nation's transit 
systems in the near future.
    In my view, it is becoming increasingly clear that we will 
have to significantly increase Federal support for transit to 
help communities make the investments in infrastructure and 
system preservation that will be required to move America into 
the 21st Century.
    This is the context in which Ms. Dorn will assume the role 
of Federal Transit Administrator, the Nation's lead spokesman 
for transit.
    Ms. Dorn has an impressive background, having served in top 
positions in both the public and private sector, at the U.S. 
Departments of Transportation and Labor and at the American Red 
Cross and at the National Health Museum.
    I am looking forward to working with her on addressing 
these challenges and ensuring the continued success of 
America's transit systems.
    We are pleased to welcome her to the Committee this 
morning.
    Ms. Dorn, if you could stand, I will give you the oath and 
then we can proceed to your testimony.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Ms. Dorn. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Ms. Dorn. I do.
    Chairman Sarbanes. Thank you very much.
    We would be happy to hear your statement. If you want to 
introduce your young men to the Committee, we would be happy 
for that to happen as well.

           STATEMENT OF JENNIFER L. DORN, OF NEBRASKA

              TO BE FEDERAL TRANSIT ADMINISTRATOR

               U.S. DEPARTMENT OF TRANSPORTATION

    Ms. Dorn. Thank you, Mr. Chairman.
    I will take the mother's prerogative, even though Senator 
Smith graciously introduced my two sons. Jonathan is 11--would 
you stand Jonathan? Benjamin is 9 today, as a matter of fact.
    Chairman Sarbanes. Good. Happy birthday.
    [Applause.]
    Ms. Dorn. Mr. Chairman, I certainly agree with the thrust 
of your statement about the transit components of our 
transportation structure being so vital.
    I also appreciate very much the fact that both Senator 
Smith and Senator Wyden would agree to come before your 
distinguished Committee today. I think both of them represent 
the hallmark of public service and have set a fine example that 
is in the Oregon tradition of bipartisanship.
    I am very proud of that. I think it represents how working 
together is important in all aspects of our Government, but 
perhaps particularly so as we debate the issues revolving 
around transportation and transit.
    So, I am honored to have been introduced by them and hope 
to live up to that kind of tradition. If I am fortunate enough 
to be confirmed, then that is the kind of hallmark I hope to 
bring to my job.
    Indeed, it is an honor for me to be nominated by President 
Bush and a privilege to be here before you, Mr. Chairman, and 
this distinguished Committee.
    I was very impressed and humbled by my fellow nominees' 
statements and reminded yet again of the importance of the 
opportunity to serve the public.
    I was also reminded how wonderful it is to be able to have 
two young boys who are learning about the Government process by 
being here today. Ben, my younger boy, leaned over to me after 
one of the statements and he said, ``Mommy, if they lower the 
tax dollars, will they lower it just for America or for the 
whole world?''
    [Laughter.]
    And so I realize how beneficial it is for our young people 
to know more and more about Government.
    Fundamental to so much of our economic strength and the 
quality of life is our transportation system in this country. 
And an increasing component of that success is transit. If it 
is planned carefully and executed well, it is indeed vital to 
our future even more than it was in the past.
    As well it should be. As you so well articulated, Mr. 
Chairman, transit provides economic development. It ensures 
livability in communities. And it also provides for the public 
good. That is a very important Federal role, providing for 
those who have no other choice but to use a transit system. It 
needs to be there.
    I am very passionate about a number of things, Mr. 
Chairman, most importantly about public service, as I think my 
experience will attest.
    I am humbled to serve President Bush and the Administration 
if confirmed by this body, and to serve under two outstanding 
transportation leaders who are far more expert than I. I have 
long admired Secretary Mineta and his work in the 
transportation field, as well as Deputy Secretary Jackson. So 
it would be my privilege to work with a fine team, if 
confirmed.
    If I might, I would just take a couple of moments to 
indicate to you at this preliminary stage the priorities that I 
see for the Federal Transit Administration.
    First among them, I believe, is meeting the increasing 
demands for transit across this country.
    Second, I believe improved oversight is very critical and 
it also fulfills the purpose of the first goal. We need to have 
credible programs in order to meet that increasing need.
    Third, I think the employment issue is critical for not 
only our FTA workforce but also our transit industry workforce. 
We face many challenges in terms of attracting the right kind 
of experts who need to understand issues of complexity when 
building large projects or meeting the needs of various 
constituent groups.
    If I could just elaborate a bit on the first two.
    We have seen dramatic changes in a number of our largest 
communities across the country, as you indicated in your 
opening statement, Mr. Chairman. There is a widespread 
recognition that transit can play an important role in the 
largest of communities.
    As you noted, ridership is at record levels and local 
investment has never been higher. And that is important to all 
of us.
    At the same time, in much of America, transit plays a 
supporting role in local transportation as well, providing a 
safety net for low-income persons, for the elderly, and for 
those with disabilities. And in these instances, it is my firm 
conviction that the Federal program is important.
    Reauthorization is a critical point at which we begin to 
focus on these things. And if I am confirmed, I believe it is 
an important role that I and my team would have in terms of 
making sure that we bring the relevant data to the policy 
table.
    We have had certain levels of programs and program matches 
and shares, and while history is an important guide, it should 
not be a stranglehold.
    I think that one of my main tasks will be to ensure that 
Congress, OMB, the President, and the Secretary, get the kind 
of information that will allow them to make timely and relevant 
decisions which respond to today's and future needs. I consider 
transit as being a very important need.
    Knowing, however, there is never enough money to do all 
that we wish in transit or almost in any type of Government 
activity, I would be eager to explore with the Committee, ways 
that we can better leverage our Federal tax dollars. I think 
there are a number of opportunities that have already been 
initiated in previous administrations and that need to be 
continued.
    Innovative finance is an important arena, as are service 
innovations, increased intermodal cooperation, more effective 
implementation of technology, communicating best practices, and 
the effective use of the private-sector where it makes sense 
and where it can provide efficiencies.
    I certainly intend to learn more about the factors that 
make some transit investments more successful than others. And 
that leads me to my second priority, and that is improved 
oversight.
    GAO has indicated that perhaps the most significant 
management challenge for the FTA is to manage a growing number 
of transit projects nationwide. And the President's budget 
provides for an increase in that regard.
    We are also engaged in planning oversight and it was 
through the wisdom of Congress and TEA-21 that Congress was 
very explicit about a rigorous review process for new starts.
    I think that serves the Nation and the individual projects 
well. We have learned a great deal. It is my understanding that 
over the decades, or two decades, that these projects have been 
undertaken and many improvements have been made.
    But I think we can always place more emphasis on a number 
of oversight arenas to give the public the confidence that 
localities have the information they need to make effective 
decisions.
    Sometimes, from what I have been reading, the cart may come 
before the horse. And that is that communities may tend to 
define the solution, whether that solution be rail system, 
road, bus, rapid transit, or some other approach, before they 
have adequately defined the problem and identified all the 
alternatives.
    I feel very strongly that there is an important Federal 
role in transit, but that the local decision is imperative and 
should guide us. That local decision should have transparency 
so that all of the alternatives are indeed addressed.
    As I mentioned, the third priority, I believe like many of 
the Federal agencies, that the FTA faces a serious workforce 
challenge. And I believe that FTA, from the data that I have 
been given, has the oldest workforce of all of the agencies in 
the Department of Transportation. Nearly half of the FTA's 
workforce is eligible to retire in the next 4 years. The 
transit industry faces similar challenges in recruiting and 
retaining individuals of specialized skills.
    I know the difficult job that many of our transit operators 
face in trying to meet the needs of the public in a complex 
environment.
    With that, Mr. Chairman, I am very pleased to be able to 
answer any questions, or attempt to answer questions that you 
might have.
    Thank you.
    Chairman Sarbanes. Thank you very much, Ms. Dorn. We very 
much appreciate your statement.
    Actually, let me just pick right away on one of the points 
you made involving the local level.
    FTA has joint responsibility with the Federal Highway 
Administration for issuing regulations to implement the 
planning provisions of TEA-21. In part, those planning 
provisions are designed to increase and clarify the role of 
local communities, in effect, the citizens in the development 
of transportation policy.
    For example, there is a provision in TEA-21 which I was 
intimately involved with, which requires metropolitan planning 
organizations to provide to the public an annual listing of 
transportation projects which have received Federal funds. This 
is an effort at transparency, of making more information 
available to the public so that they are in a better position 
to comment.
    We receive reports that without guidance from the 
Department of Transportation, local planning bodies are 
uncertain how to comply with the public participation 
requirements of TEA-21, leading to incomplete and inconsistent 
compliance. Prompt issuance of final rules would obviously help 
transportation planners and community organizations to have 
access to the information they need to fully participate in the 
transportation planning process.
    I really bring this to your attention, because I think this 
question of these regulations is an important question. I also 
think FTA could take steps to assist transit agencies in 
complying with the planning requirements of TEA-21, even in the 
absence of the implementing regulations. Are you familiar with 
this problem or have any awareness of it?
    Ms. Dorn. Yes, Mr. Chairman. In my brief tenure, that has 
been brought to my attention.
    If confirmed, I would certainly see what kinds of 
assistance we might be able to give even in the absence of 
regulations to help provide this transparency. I am in total 
accord with the need of the local community understanding fully 
what the Federal Government programs mean for them locally, and 
I know this is an important matter.
    I am very eager to work with the Federal Highway 
Administrator when he or she is appointed because I know that 
they have a significant responsibility in promulgating these 
regulations.
    I do understand that they have been quite contentious and 
it may take a bit of time to work that out. You have my 
commitment, that if confirmed, I will do everything I can to 
move this expeditiously and to try to achieve the outcome you 
have suggested.
    Chairman Sarbanes. Thank you very much. I mean, obviously, 
we would like to get the regulations for the planning 
provisions of TEA-21 in place before we turn to the next 
authorization, which will be in the next Congress. Thus, we 
will then have a building block to work with.
    Federal law requires that transit grant recipients spend a 
portion of their money on transit security projects, such as 
increased lighting, increased camera surveillance, emergency 
telephone lines to contact law enforcement or security 
personnel. Obviously, this is important to the users of transit 
and it is also important to the employees of the transit 
system.
    The law gives grant recipients the option to certify to FTA 
that the required security expenditure is unnecessary. And I am 
curious as to what your view is of the steps that FTA should 
perhaps take to ensure that transit agencies are making 
adequate investments in systems security. There is some concern 
that it is being overlooked to some extent.
    Ms. Dorn. Mr. Chairman, it certainly is an important issue, 
particularly given the number of circumstances which have 
occurred locally, and I know, to a degree, in other parts of 
the country.
    I am not fully informed about all aspects of this issue. I 
do know that the Federal Transit Administration has the 
authority, when a transit operating agency requests it, to 
perform a security audit. The FTA will do its very best to 
accommodate the request and help ensure that those security 
measures are adequate.
    Whether that is a sufficient authority, I am not versed 
enough to know, but if I am confirmed, I will certainly look 
into that matter. I think that security and safety are 
absolutely vital to continuing an increase in ridership. If 
people are not confident that they will be safe in transit, 
they will not use it, and we need them to use it.
    Chairman Sarbanes. I think that is a very important point. 
People almost sense it, or there is a word of mouth that 
spreads that this is a safe system to use, and obviously that 
attracts users, or that this system has security problems 
associated with it, which of course drives away users.
    One very quick question, because I see that my time has now 
expired. As the debate begins on a new transit-highway 
reauthorization bill, which we are going to be leading into, 
will the Department or FTA, more narrowly, be conducting any 
listening sessions to hear more about what is needed in Federal 
legislation to address transit issues?
    We would like you to, in a sense, make some commitment to 
do these listening sessions across the country. Obviously, you 
have to be selective. You don't have an infinite amount of 
time. But we think that could be very helpful, to get the input 
from the local authorities and others in terms of what they 
think ought to be in the next authorization.
    Ms. Dorn. I wholeheartedly agree, Mr. Chairman. It is my 
understanding that Secretary Mineta has indicated his desire to 
hold those listening sessions throughout the country. And I can 
assure you that, from my vantage point, it is important to not 
only participate in those formal sessions, but also I view a 
large part of my job to be a listener, informally as well, to 
members of the transit community, to the labor community, and 
to the community leaders who have responsibility for transit. I 
think it is an important job, especially in light of the 
upcoming reauthorization.
    Chairman Sarbanes. Good.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I would like to welcome Ms. Dorn.
    Ms. Dorn. Thank you.
    Senator Allard. We appreciate your willingness to take on 
the responsibilities as FTA Administrator. More specifically, I 
would like to know what you will do to promote opportunities 
for the private sector, to be involved in transit service.
    I am particularly interested in whether or not you would 
support reestablishing the Office of Private Sector Initiatives 
within the Department of Transportation.
    Ms. Dorn. Thank you, Senator Allard.
    Few things are more important outside of delivering service 
to the public in an effective manner than that we do so in a 
cost effective manner, as well. And I think in certain 
instances, and perhaps in more instances than we actually 
practice, utilization of the private sector is very important.
    It would be premature for me to say to what degree or in 
what programs we should enhance that participation. I am fully 
aware that the law requires us to do that in the Federal 
Transit Administration. And if I am confirmed, that will be one 
of my first areas of endeavor, to see how is it that we can 
improve the service through efficiencies that I think have been 
demonstrated where private-sector contracting, for example, is 
utilized. Where it makes sense, it works well. And so I would 
be eager to work with the Committee on that, if confirmed.
    With respect to the organization of the Federal Transit 
Administration, I have not yet had an opportunity to look at 
the boxes, so to speak. I can tell you from my experience in 
Government and my personal perspective in leadership that even 
if a box is not created for a certain endeavor, if it has the 
priority of the Administrator and the Secretary and his or her 
team, and that is well known, that this can be as effective a 
tool as any kind of organizational structure.
    So, I would just not want to be tied into that structural 
piece. But you would have my firm assurance that I will do 
everything I can to make sure that we can make our systems even 
more cost effective.
    Senator Allard. I would certainly appreciate that. I have 
been concerned for some time about the mass transit funding 
formulas. It goes clear back to when Senator Alfonse D'Amato 
was actually Chairman of the Committee here, representing a 
large metropolitan area. I represent a State that is a rapidly 
growing State, and there are many parts of the country that 
find themselves in rapidly growing areas where they want to 
look at mass transit as an alternative kind of way of getting 
to work and getting around in their communities and find that 
the formula has made that difficult for them to even get 
started. I worked with Senator D'Amato on the last 
transportation bill to get some more money available for these 
new systems.
    I think we want to be sensitive to these areas of the 
country that already have existing systems. I don't think we 
want to cut into their maintenance and operation and what they 
need.
    But I am disturbed when I see how much goes just to a few 
cities and it seems like the rest of the country gets left out. 
And many times, that is where the new revenue is coming in, 
from these other parts where there is more growth and whatnot.
    I would hope that you would be willing to work with me on 
trying to find fair and more equitable ways to distribute some 
of those mass transit dollars.
    Ms. Dorn. Absolutely, Senator Allard. I know that this will 
be an issue of hot contention, as we proceed in 
reauthorization.
    From the perspective of the Federal Transit Administration, 
I recognize very clearly that there are various ways to define 
need, and in fact, need is the basis on which the formulas have 
been established in statute.
    I certainly recognize, as you and I have discussed 
previously, that maintaining the existing systems in urban 
areas is a critical need, as is addressing those kinds of needs 
in new and rapidly growing areas, such as in the Southwest. 
Rural needs are equally as important.
    So working with Congress to see how we can equitably meet 
all of those needs is a priority.
    I recognize that in this case, equity is really in the eye 
of the beholder. That means that we will have to do a certain 
amount of compromising, recognizing that we don't have all of 
the funds that we may need. But my goal would be as yours is, 
to make sure that we have an equitable distribution so that 
transit throughout the Nation can continue to be successful.

    Senator Allard. All I ask is that you look through the eye 
of this beholder.

    [Laughter.]

    Thank you, Mr. Chairman.

    Chairman Sarbanes. Now, we will turn to the eye of another 
beholder.

    [Laughter.]

    Senator Reed.

    Senator Reed. Thank you, Mr. Chairman.

    Let me first say, Ms. Dorn, that if the Federal Transit 
Administration behaves under your tenure, as well as your sons, 
we will be in good shape.

    [Laughter.]

    This is even worse than church--there is no music.

    [Laughter.]

    Ms. Dorn. It is the promise of McDonald's afterwards.

    Senator Reed. Well, promise us lots of transit projects and 
we will all get along great.

    [Laughter.]

    Let me just ask initially two basic questions. Currently, 
under TEA-21, there is an 80-20 split between highways and 
transit. And as we go forward with the reauthorization, would 
you suggest or advise that this split be maintained or that 
there be any changes made?

    Ms. Dorn. Mr. Chairman, I believe that it would be 
premature to comment definitely. However, if I could just give 
you my philosophical perspective.

    Historically, as you have rightly point out, the 80-20 
share has been established in law and guaranteed, in fact, 
under the highway trust fund.

    Certainly, as in the allocation formula that Senator Allard 
just mentioned, the issue of the share will be of significant 
debate, as it has been in the past.

    I am a firm believer that history should be a guide, but 
history should not be a stranglehold. I believe it is very 
important that if I am confirmed as the Federal Transit 
Administrator, I make sure as much data are available for 
decisionmakers to determine this issue based on need, rather 
than strength of an ideology or strength of a lobbying group.

    And I wholeheartedly believe that the highway industry, as 
well as the transit industry, is interested in having an 
adequate transportation program. So it will remain to be seen 
whether that match or that share continues as it is. But my 
job, I believe, is to provide the information so a useful 
debate can occur and decisions made on the merits.

    Senator Reed. Thank you.

    Another aspect of this issue of allocation is that within 
the transit programs, the Administration has proposed a 50-50 
split on funding a share between the States, localities, and 
the Federal Government. This is in contrast to the highway 
projects in which they are still suggesting an 80-20 split.
    First, this raises an obvious issue of those projects which 
States will not undertake because they cannot come up with a 
50-50 match.
    Second, it is a philosophical issue. At a time when 
everyone, and my colleague, Senator Allard, who I concur with 
in terms of trying to encourage mass transit, seeing out in 
Denver where they can build highways, but that doesn't help 
them in their environmental quality and, indeed, moving people 
around.
    And yet, if we adopt this approach where States are 
penalized more, effectively, for transit projects than highway 
projects, I think it would be indeed a mistake. I wonder if you 
might respond to that as best you can.
    Ms. Dorn. Thank you, Senator. I would be happy to.
    I certainly support the President's proposal for a 50-50 
match at this point. As you are well aware, it commences in the 
year 2004. The purpose was to give the States and the 
localities an opportunity to plan. I would point out a couple 
of things, however, with regard to that.
    First of all, the current legislation permits a Federal 80-
20 match. However, in practice, it is my understanding that the 
average share is about 50 or 53 percent, Federal-local. The 
purpose of this 50-50 split, as I understand it, is to 
accomplish two goals. One is to encourage greater local 
transportation investment and involvement. Two, and perhaps 
even more compelling, is to provide a better leverage for 
limited Federal funds.
    The reality of this situation, as I understand it, is that 
we have 192 projects that are authorized and in the pipeline. 
And of the $9.6 billion, we have only $435 million remaining to 
be committed, through the end of the authorization.
    This is of concern to the Administration. So that is why we 
gave the heads-up for the year 2004.
    I would, however, be eager to work with the Committee 
because I believe there are a variety of ways, of means that we 
can accomplish these goals. I know that we can work with the 
State and local leaders in the interim to explore alternative 
funding as well.
    I think this issue will be terribly critical as we approach 
reauthorization and the timing of reauthorization is 
commensurate with the timing of the 50-50 proposal.
    Senator Reed. Thank you very much. Again, one way to deal 
with the dilemma is to put more resources in so that we can 
fully fund at an appropriate 80-20 or whatever the share is, 
without resorting to this 50-50 arrangement.
    Again, I don't think I am alone, but my governor and my 
highway department and my transit departments complain bitterly 
now about making the 20 percent match for highway projects, and 
whatever match there is in terms of saying, they just don't 
have the resources, but they have the real demands to fix 
highways and improve transit.
    We look forward to working with you, Ms. Dorn.
    Ms. Dorn. Thank you very much, Senator. I do, too.
    Chairman Sarbanes. I just want to pick up on that. I think 
this is an extremely important issue. It won't come to a head 
until we do the next reauthorization.
    It is one policy issue if the Federal Government says, or 
the Administration says, we want to give only 50 percent on 
these transportation projects, transit and highways. And we 
want the States and localities to come up with more money.
    Now that raises, obviously, certain issues that have to be 
addressed. An argument for it is the Federal money will go 
further. An argument against is the States and localities say, 
where is the money going to come from? But at least that 
approach keeps transit and highways in the same parallel 
position.
    It is another thing if the Administration says, we want to 
cap the transit share at 50 percent, but we are going to 
continue the highway share at 80 percent.
    One of the things that we have worked very hard at over the 
years is to try to put them, highways and transit, in an 
equivalent position and certainly to eliminate tipping the 
scale in a way that a locality would decide how to meet their 
transportation needs, not on the basis of all of the factors 
that go into transportation, environment, how you move people 
and so forth, but the fact that they get 80 percent Federal 
money if they go in one direction, and under the proposal, 
would get only 50 percent if they go in a different direction.
    So, I think as a transit administrator, you have to be very 
sensitive to the difference in those two approaches because if 
we go to 50 percent transit while we stay with 80 percent 
highway--I might want to stay with 80 percent with both. Or you 
could go to 70 percent with both. You can work that, but you 
would keep it even.
    You have another situation, if you change the dynamics of 
choice that the local people are confronted with. We have 
worked very hard to try to get them on a parallel basis so that 
the decisions can be made on transportation-related criteria, 
and not on the basis of which approach gives us the most 
Federal money.
    Ms. Dorn. May I respond?
    Chairman Sarbanes. Yes.
    Ms. Dorn. Mr. Chairman, I agree substantively with your 
point and the disparity is in fact a puzzle to me. But I have 
not had the opportunity to hear the highway perspective. I 
think we will probably, if I am confirmed, have some 
interesting discussions. I think that this is an advantage of 
Secretary Mineta's strong feeling about the ``one D.O.T.''
    We cannot afford, for the benefit of all of the local 
communities which the Federal Government serves, to look at 
these issues in silos and to perhaps unintentionally skew the 
local choices.
    I look forward to working with you and I hope that we can 
come to some accommodation. I believe we share the goal to 
increase effective transit programs and that is an important 
thing for the future of this Nation. I pledge to you that I 
will work very hard on that issue.
    Chairman Sarbanes. Ms. Dorn, the fact that in practice it 
is not always at 80 percent, in my view, is not decisive 
because the fact that it could be at 80 percent, on occasion, 
it is used in order to make the localities able to move with 
the project. And the fact that it can be used at 80 percent 
does keep some parity with the highway money.

    I do know that in practice, the localities have been 
willing to come up with more money in order to move transit 
projects, which gives some indication of the importance that 
they attach to these transit projects.

    I have just a couple of questions.

    Many in the transit industry credit TEA-21's funding 
guarantees with reinvigorating the transit program in America. 
The guarantees have given transit planners a measure of 
certainty that the Federal Government will stand by promises 
made in TEA-21. In an industry where capital improvements often 
require years to complete, some level of certainty about the 
funding stream is essential. What is your view on a guaranteed 
funding stream and its importance for transit?

    Ms. Dorn. My view, Mr. Chairman, is that this mechanism has 
been terribly important to States and localities in terms of 
their assurance that there is some level of stability in terms 
of the funding. It allows the States and the localities to, in 
fact, plan. I think that in turn provides an effective leverage 
of Federal funds.

    Under reauthorization, I know that I, like the Secretary, 
will work with OMB and the Congress to do everything we can to 
ensure that we provide the necessary funding levels.

    I would also note that the President has indicated that all 
of the revenue generated by the Federal gas tax should be used 
for transportation purposes. And it seems that the funding 
mechanism has been an excellent way to help ensure that that 
comes about.

    Chairman Sarbanes. Finally, as I think you are aware, many 
of our national parks and other public lands are experiencing 
greatly increased visitation. In 1975, the total number of 
visitors to America's national parks was 190 million. By 1999, 
that number had risen to 287 million. And it is climbing. This 
record number of visitors, which has brought a record number of 
cars, has resulted in increasing stress on our national parks. 
Obviously, congestion detracts from the visitor's experience, 
contributes to the degradation of the natural and historical 
and cultural resources.

    There are reports of people waiting in their car, inching 
along, 5, 6 hours, in order to get into a national park--
Yosemite or Grand Canyon or whatever it may be.

    I want to work with you. I have the intention of 
introducing legislation, Transit in the Parks, designed to help 
our parks and our public lands address these problems. And it 
would undertake to provide Federal assistance to support the 
development of alternative transportation in these sensitive 
areas.

    In other words, people would drive to a marshaling area 
outside of the national park and then leave their automobile or 
trailer or whatever there and then be transported into the 
national park through some form of mass transit.

    There are lots of possibilities. Some of the national parks 
are already experimenting with this. We will be in touch with 
you as the Administrator to involve you in that effort. It is 
not right at the core of what you do, but I think it is 
becoming an increasingly important challenge. And there is a 
lot of receptivity to it, including, interestingly enough, 
there are a number of States who don't have the kind of urban 
population that calls for a transit system to move people back 
and forth to work. But they do have within those States some of 
these major national parks, which are increasingly confronted 
with this problem.

    Actually, I have talked to some of my colleagues who 
normally do not focus on mass transit at all because they do 
not see it as relevant to their State, who now see that this 
would offer an opportunity to enhance this park experience and 
to enhance the economic development that is associated with 
those national parks.

    I just want to say, we look forward to trying to work with 
you on that problem. I think, if I were going to be an 
Administrator of the FTA, it would be an initiative I would be 
interested in because, in a sense, it would be sort of 
historic. It would be a new breakthrough and it would give you 
a wonderful reason to take your two young men and visit these 
national parks across the country. So it could be a good 
summertime experience there.

    [Laughter.]

    Ms. Dorn. I totally agree, Mr. Chairman. Notwithstanding 
even that personal sort of benefit, as an Oregonian I have 
spent many a weekend in national parks and national forests.

    I commend you for your strong interest in this and I look 
forward to working with you. It is my understanding that FTA 
has provided technical assistance to different parks which are 
seeking to make transit opportunities more available. I am 
proud that we have already done that. I know that you have 
mandated a study through TEA-21, which I have not had the 
opportunity to read, but I believe that it is working its way 
through the Department and the Administration. It is currently 
under review.

    I am proud and personally delighted that the President also 
has undertaken an initiative to upgrade and improve the 
maintenance of these national treasures. I will be eager to 
work with you on that matter. It is important.

    Chairman Sarbanes. Good. I will close with this 
observation.

    Your career has been quite a distinguished one, including, 
of course, the number three position in the Department of 
Transportation at an earlier time, when Mrs. Dole was the 
Secretary. But you have also worked with, of course, Senator 
Hatfield. I don't know that you could come before the Members 
of the Senate with a better connection, as it were, than to 
have been associated with Mark Hatfield, for whom we have 
tremendous respect and affection and who was such a 
distinguished and able member of this body. And of course, you 
later worked with Elizabeth Dole, for whom we also have very 
high respect.

    Ms. Dorn. I have been very fortunate in my career to have 
wonderful mentors.

    Chairman Sarbanes. Yes.

    Ms. Dorn. I feel privileged.

    Chairman Sarbanes. We are pleased to have you here before 
us. We will try to move your nomination along.

    I think you heard me earlier when I indicated we still have 
not been able to fully constitute the Committee. So action is 
actually awaiting that, and once that is done we hope to move 
you along and get you down to the Department of Transportation 
and get you working.

    Ms. Dorn. That would be great. Thank you.

    Chairman Sarbanes. Thank you very much.

    The hearing is adjourned.

    [Whereupon, at 11:58 a.m., the hearing was adjourned.]

    [Prepared statements, biographical sketches of the 
nominees, and response to written questions follow:]
               PREPARED STATEMENT OF SENATOR WAYNE ALLARD
    I would like to thank Chairman Sarbanes for holding this hearing. 
It is important that we get vacant positions filled as quickly as 
possible, and I appreciate his expediency in scheduling hearings. It is 
my hope that this Committee can work with the White House to quickly 
fill the remaining positions.
    As the Ranking Republican on the Housing and Transportation 
Subcommittee, I am particularly pleased that we will have a chance to 
hear from our witnesses today. Although housing and transportation are 
sometimes the forgotten issues of this Committee, I believe that they 
are some of the most important. Housing and transportation matters 
touch the everyday life of every citizen, and our nominees today 
understand that responsibility. I believe that they are all well 
qualified and will be assets to the Department of Housing and Urban 
Development and the Federal Transit Administration.
    It is especially important that we get very good people at HUD. 
Most of HUD's programs are still designated as ``high-risk'' by GAO, so 
HUD needs leaders who can take the actions necessary to turn HUD 
around. There are also important responsibilities at the FTA. As more 
communities face a transportation crunch, the responsibilities of the 
FTA and its Administrator will increase.
    I would like to conclude by saying welcome to our witnesses today. 
I look forward to your testimony, and I look forward to working with 
you on matters important to the people of Colorado.


















































                 PREPARED STATEMENT OF JENNIFER L. DORN
        Administrator-Designate, Federal Transit Administration
                   U.S. Department of Transportation
                             June 21, 2001
    Thank you, Mr. Chairman and Members of the Committee.
    It is an honor to have been nominated by President Bush to be the 
Administrator of the Federal Transit Administration and a privilege to 
appear before you this morning. If confirmed by the Senate, I very much 
look forward to working closely with Secretary Mineta and the Members 
of this Committee to ensure that America's transit systems serve the 
transportation needs of people across the Nation.
    As you may know, I had the privilege to have been nominated by 
President Reagan and confirmed by the Senate to serve as Associate 
Deputy Secretary of Transportation in 1985 under Secretary Dole. 
Combined with my tenure as a Special Assistant to the Secretary and as 
the first Director of the Department's Office of Commercial Space 
Transportation, I had the opportunity to spend 5 years at the 
Department of Transportation--years which reinforced my commitment to 
public service and to the vital importance of an effective 
transportation system in ensuring the vitality of communities 
everywhere. It is with great anticipation and enthusiasm that I hope to 
return as the Administrator of the Federal Transit Administration.
    I also had the privilege to serve at the pleasure of President Bush 
with the consent of the Senate as the Assistant Secretary of Labor for 
Policy in 1989. From that vantage point, I developed an understanding 
of the importance of transit in providing access to jobs, as well as 
the importance of a ready and able workforce to build and operate our 
transit systems.
    My leadership and management experience has not been limited to 
Government. At the American Red Cross, I saw how people working 
together could solve seemingly insurmountable problems. As Senior Vice 
President of the American Red Cross, I managed a budget that reached 
$400 million and a workforce of over 400 people who helped mitigate the 
terrible effects of natural disasters and ensure the provision of a 
safe and adequate blood supply. When hurricane winds or earthquakes 
destroy or incapacitate vital transportation facilities and routes, the 
economic effects of such disasters are magnified and getting relief 
services to those affected is made even more difficult. It is in the 
midst of such disasters that one can fully appreciate the role that our 
Nation's transportation services play each and every day in making our 
communities more livable, safe, and economically strong.
    Mr. Chairman, I am an advocate for a Federal transit assistance 
program which achieves some of our most important national 
transportation goals. If confirmed, I will make full use of the Federal 
Transit Administrator's office to work with communities and their 
leaders in four critical areas:

 Providing and enhancing mobility and accessibility for people 
    in urbanized areas, our suburbs and rural communities.
 Ensuring the safety and security of our Nation's transit 
    systems.
 Working to encourage the development of transit systems that 
    promote economic growth.
 Playing an active role in developing livable communities while 
    protecting our environment.

    As you know, transit is not an end in itself. It is a means by 
which we accomplish other goals, the principle one of which is 
providing mobility to people. Just as local needs and problems differ, 
so must the transit programs that are designed to meet those needs. It 
is self-evident, perhaps, to say that the needs of New York City are 
fundamentally different from the needs of Omaha, Nebraska. What has not 
always been so clear, however, is that we must have a Federal program 
that is adaptable and responds to the needs of all.
    In the largest metropolitan areas, where traffic congestion is a 
pressing concern, transit is central to the transportation system, 
serving every element of the community. In the Washington, DC area, for 
example, the Metro system is now reporting 700,000 daily riders, making 
it difficult to imagine highway congestion levels without such a 
transit option. In other communities, transit serves primarily as a 
safety net, providing mobility to people with few other options--the 
poor, the elderly, and persons with disabilities. Our Federal programs 
should respond to each of these situations, as well as to the many 
variations that exist between these two examples.
    The Federal role in transit began in the early 1960's, in response 
to urgent needs in many communities as private transit operations 
across the Nation failed. The Federal Government partnered with local 
governments to maintain mass transit in the face of widespread 
insolvency among private transportation providers. Early in the 
program's history, the Federal Government focused on improving the 
physical infrastructure of transit and on ensuring the financial 
viability of public transit systems.
    During the past two decades, more and more local communities began 
to recognize that transit could and should play a larger role in the 
community transportation system. The Federal program was critical in 
many regions that sought to better integrate transit into their plans 
for economic development and livable communities. More recently, there 
has been dramatic growth in the number of communities--of many 
different sizes--that recognize that transit can enhance the livability 
of the community, promoting and responding to economic growth and 
development. It can also serve as an important safety net for the 80 
million Americans who do not drive because of age, disability, or 
income.
    The Federal role in surface transportation has been in support of 
State and local government. The basic responsibility for making local 
decisions and meeting local transportation needs has and should rest 
with State and local government. The Federal transit program, from the 
start, has played a supporting role in local transit programs. That 
fundamental principle should remain and be enhanced.
    Mr. Chairman, should I be confirmed, I will gratefully dedicate my 
energy, experience, and commitment to the vital mission of the Federal 
Transit Administration. I am particularly mindful of the important 
discussions that will take place during the upcoming reauthorization of 
the surface transportation program. And I pledge to this Committee that 
I will vigorously pursue the mission of increasing transportation 
choices in local communities. I am eager to work with you, with the 
President, with Secretary Mineta, and with transportation colleagues 
throughout the country to continue to improve transit in America.
    Mr. Chairman, thank you again for the opportunity to address the 
Committee. This concludes my testimony, and I would be pleased to 
answer any questions that you may have for me this morning.














RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM RONALD A. 
                           ROSENFELD

Q.1. What are your thoughts on allowing Ginnie Mae to enter 
into a public /private risk-sharing initiative that allows 
Ginnie Mae to securitize conventional loans that are partially 
insured by the private market?

A.1. The issue raised by this question requires a response with 
two separate components. The first is an inquiry as to whether 
Ginnie Mae can execute such a program and more specifically can 
it execute such a program successfully. The second is whether 
from a policy standpoint such a program would be prudent.
    Given the 30 year history of Ginnie Mae, its innovations, 
its profitability, its record of minimal ``findings and 
material weakness'' by the Inspector General and GAO, there is 
no question that such a program could be operated by Ginnie Mae 
with the caveat that such additional resources as may be needed 
would be provided.
    The question of whether such a program could be operated 
successfully is more complex. Here the place of beginning is 
not to rely on the generally benign description of a ``public /
private risk-sharing'' but rather to inquire, in great detail, 
as to the specifics of the arrangement. From Ginnie Mae's 
standpoint, the critical issues include, but are not limited 
to, the nature and extent of the risks being undertaken on 
behalf of the Government, the financial and structural 
qualifications of the private sector participant, the fee 
structure, etc.
    It would seem that an arrangement as envisioned by the 
question could be successfully developed provided that the 
terms and conditions of the relationship were determined by 
Ginnie Mae representing the interests of the Government rather 
than by having the operative provisions being determined by the 
private sector participant.
    The issue of whether the concept is prudent should be 
addressed by only one voice emanating from HUD and that voice 
should be that of Secretary Martinez. In my opinion the 
framework in which to formulate a position on the matter must 
include an evaluation of the entire structure of our mortgage 
finance system including an evaluation of the current merits of 
our system of GSE's.

Q.2.a. Ginnie Mae's single-family guaranty fee is scheduled by 
statute to increase from 6 basis points to 9 basis points in 
October 2004. This cost increase will likely be passed on to 
FHA and VA borrowers. What is your position with regard to this 
change in Ginnie Mae's fee structure?

A.2.a. The imposition of fixed fees as determined by the 
Congress is not conducive to the success of Ginnie Mae. We 
operate in a competitive marketplace and our clear mandate is 
to help families realize their dream of owning a home. An 
example is our Targeted Lending Initiative where we help 
facilitate homeownership by reducing our guarantee by up to 3 
basis points. The pending change to a 9 basis point guarantee 
fee, without discretion, would eliminate this important 
program.
    The process of buying a home is complicated and costly. As 
we attempt to be innovative and creative with other 
participants in the financing of single-family housing our 
options are severely limited by a mandated fee structure. In 
addition, as we strive to encourage others to reduce costs it 
does not enhance our credibility to raise our fee.

Q.2.b. Would you support a study to evaluate the impact of this 
increase on the homebuyers and on Ginnie Mae's volume?

A.2.b. I would be in favor of such an impact study. The most 
likely scenario is that the increased fee would be paid by the 
first-time homebuyer at the time of closing rather than being 
absorbed by the mortgage originator. Such an outcome is 
counterproductive to what Ginnie Mae attempts to accomplish. To 
the extent that a study provides reliable data it would be 
helpful to all parties considering this policy matter.

RESPONSE TO WRITTEN QUESTION OF SENATOR CARPER FROM JENNIFER L. 
                              DORN

Q.1. Will you continue to support flexible funding that allows 
Federal Highway allocations to be used by States for transit 
infrastructure projects, that is, buying more buses, building 
capital facilities?

A.1. Since the advent of flexible funding in the Intermodal 
Surface Transportation Efficiency Act of 1991 (ISTEA) and its 
continuation in the Transportation Equity Act for the 21st 
Century (TEA-21), local officials have had the flexibility to 
allocate Federal highway and transit resources to solutions 
that best meet the needs of their residents. In my view, local 
communities are in the best position to know what their 
transportation needs are and should remain responsible for 
managing those needs within the framework of national 
priorities. I support flexible funding because it is an 
important component of meeting the transportation 
infrastructure needs in communities across the Nation.


                             NOMINATION OF:
                       DONALD E. POWELL, OF TEXAS
                   TO BE A MEMBER AND CHAIRMAN OF THE
                   BOARD OF DIRECTORS OF THE FEDERAL
                     DEPOSIT INSURANCE CORPORATION

                              ----------                              

                         TUESDAY, JUNE 26, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10 a.m., in room SD-538 of the Dirksen 
Senate Office Building, Senator Paul S. Sarbanes (Chairman of 
the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call today's Committee hearing to 
order. I want to welcome everyone.
    We meet this morning to consider the nomination of Donald 
E. Powell to be a Member of and Chairman of the Federal Deposit 
Insurance Corporation Board.
    I think we will turn, because I know she has other pressing 
engagements, to our colleague, Senator Hutchison, to introduce 
Mr. Powell.
    Two Members of the House also wish to make statements. The 
House is apparently voting at 10 a.m. So when they come over we 
will give them an opportunity to speak as well.
    But I think we will move forward with the hearing. And 
before any of us makes any statements, we would be glad to hear 
from you, Kay.

               STATEMENT OF KAY BAILEY HUTCHISON

             A U.S. SENATOR FROM THE STATE OF TEXAS

    Senator Hutchison. Thank you, Senator Sarbanes.
    I just want to say that Senator Gramm and I both know Don 
Powell very well and have worked with him in the State of Texas 
for a long number of years.
    I cannot think of anyone that I would more highly recommend 
for the office of Chairman of the FDIC than Don Powell.
    He does have a background in banking. He's the President 
and CEO of First National Bank of Amarillo, Texas, and he 
certainly has knowledge and experience in this area.
    He has seen banking at its best and banking at its worst, 
having gone through the 1980's when Texas was going through a 
difficult time. And I think that the Vice President of the 
American Banking Association, Don Ogilvy, said it best--his 
background and expertise makes him very qualified to head a 
Federal agency which provides confidence for depositors and the 
U.S. banking system.
    In addition to being one the premier bankers in Texas and 
being active in the American Bankers Association, he has also 
dedicated his life to public service.
    He has served as Chairman of the Board of Regents of Texas 
A&M University and he was a wonderful visionary leader for 
Texas A&M during his term as Chairman, which has just recently 
ended. He has helped build the university to one of the premier 
public universities in America and raised its academic standing 
and has made it a real force for education in America.
    I cannot think of anyone who would be better in this type 
of position and someone who will be dedicated to assuring that 
our banking system remains the safest and most secure in the 
world.
    With that, I certainly recommend him to you and hope that 
you can expedite his confirmation so that he can get to the 
job.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Senator Hutchison. 
We very much appreciate your coming and we certainly appreciate 
your statement.
    I know you have other engagements. So if you wish to excuse 
yourself, we understand.
    Senator Hutchison. Thank you, Mr. Chairman.
    Chairman Sarbanes. I want to welcome Donald E. Powell 
before the Banking Committee this morning.
    The President has nominated Mr. Powell to be a Member of 
the Board of the Federal Deposit Insurance Corporation and to 
serve as its Chairman. His nomination papers were completed as 
of June 11, 2001, and we scheduled this hearing promptly 
thereafter. Mr. Powell earned a B.S. in Economics from West 
Texas State University and studied at the Southwestern Graduate 
School of Banking at Southern Methodist University.
    Mr. Powell spent his entire professional career in the 
community banking industry in Texas, first as a General Loan 
Officer in the First Federal Savings and Loan in Amarillo, and 
then subsequently with the First National Bank of Amarillo. He 
became Chairman and CEO of that bank in 1987, and managed the 
bank through financial difficulties that the banks were 
experiencing in the 1980's, and from all reports, did an 
outstanding job of bringing that institution through some 
difficult times. The First National Bank of Amarillo was 
acquired in 1993 by Boatman's Bancshares, which in turn was 
acquired in 1997 by NationsBank.
    Shortly thereafter, Mr. Powell purchased a small bank which 
he renamed the First National Bank of Amarillo. That title 
seems to stay with him as he moves through life here. He holds 
onto it tenaciously, I gather.
    Senator Gramm. It is a nice title.
    [Laughter.]
    Chairman Sarbanes. That institution, for which he serves as 
Chairman and CEO, operates six branch offices in Texas with 
over $360 million in assets. The bank offers the traditional 
range of retail and commercial bank and trust services, so Mr. 
Powell brings to this appointment a lifetime of experience in 
the banking industry, and that has been recognized by a number 
of comments that we have received from different groups, of 
course from his home State Texas bankers and from other banking 
associations, noting his long-time experience.
    I am also very much taken by Mr. Powell's contributions to 
his community. He has been Chairman of the Board of Regents of 
the Texas A&M University system, which has over 90,000 
students, which at one point, I gather, for 12 years, was 
graced by the presence of Senator Gramm on its faculty.
    Mr. Powell has also served on the boards of many other 
nonprofit, public, and community organizations, including the 
United Way, the Harrington Regional Medical Center, the City of 
Amarillo Housing Board, and a number of other educational 
institutions.
    Mr. Powell, I respect your community involvement and I 
think it reflects a sense of civil responsibility and 
obligation, which we certainly welcome.
    The Chairman of the FDIC plays a critical role in 
maintaining the strength of the U.S. banking system. He or she 
makes important decisions on complex issues affecting the 
Federal deposit insurance system, the oversight of the safety 
and soundness of bank operations, and many other aspects of the 
financial markets.
    So it is a critical position in terms of the proper and 
effective workings of our financial system and we welcome Mr. 
Powell here today and look forward to hearing his testimony.
    Before I turn to you, Mr. Powell, I will turn to Members of 
the Committee for any comments they may wish to make.
    First is Senator Gramm.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Mr. Chairman, first, let me thank you for 
your very kind comments.
    It is a great privilege for me to be here to welcome Don 
Powell. There are so many things that I could say about this 
good man. He is one of the most respected citizens of my State 
and he has a long record in banking and finance.
    He took over the First National Bank of Amarillo at a very 
troubled time for that bank. In fact, The New York Times wrote 
shortly after he took over the bank: ``For nearly a century 
now, the bank has been the Rock of Gibraltar of the Texas 
panhandle. As the largest bank in the area, its capital helped 
build the vast cattle, farming, oil, and gas industries. Its 
leaders led the United Way and other charities, and it bought 
the works of local artists.'' The point of The New York Times 
article was that this Rock of Gibraltar was in very difficult 
financial straits. Under the leadership and steady hand of Don 
Powell, however, that bank made a dramatic comeback and it is 
again the Rock of Gibraltar of the panhandle of Texas. 
Obviously, there were many people who contributed to that, but 
the leader of the effort was Don Powell.
    I appreciate, Mr. Chairman, you recognizing his extensive 
commitment to public service. Don Powell has been very actively 
involved in promoting good works throughout the State of Texas, 
and I want to thank him for his willingness to serve the 
greatest country in the history of the world. It is very 
difficult to get good people to undergo all of the rigors and 
strains of public service.
    I just want to publicly say to Don Powell that I appreciate 
his willingness to take on this job. This is a very important 
position. In fact, nothing is more important to the strength of 
the American economy then safe and sound financial 
institutions. With the dramatic change in law that has been 
adopted in the last 10 years, the FDIC has become a far more 
important institution than it has ever been. And quite frankly, 
it makes me feel comfortable, Mr. Chairman, to have someone who 
will be in that job who has had practical experience in trying 
to deal with exactly the kind of problems that the FDIC is 
trying to help banks, large and small, deal with all over the 
country.
    I thank you, Mr. Chairman, for holding this timely hearing.
    Chairman Sarbanes. Thank you.
    Senator Johnson.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Chairman Sarbanes and Ranking 
Member Gramm.
    Welcome, Mr. Powell. I extend congratulations to you. I am 
confident that you will follow on Donna Tanoue's leadership at 
the FDIC.
    This has been a good year, Mr. Chairman, for the Powell 
family, with Colin Powell as Secretary of State, Michael Powell 
at the FCC, and now Don Powell as Chairman-to-be of the FDIC.
    [Laughter.]
    I am pleased to have this opportunity to succeed the 
Chairman of the Financial Institutions Subcommittee and look 
forward to working with Senator Bennett in that matter.
    We heard from our banking regulators last week and we are 
fortunate to be witness to an extremely strong banking industry 
at this day and time.
    While we have to remain vigilant in monitoring warning 
signs of a softening economy, we find ourselves with an 
important opportunity to take stock of our financial 
institutions.
    I am committed to taking advantage of this opportunity to 
propose comprehensive reform of our deposit insurance system 
and I hope to be able to introduce bipartisan consensus 
legislation sometime after the July 4 recess.
    As I noted in our previous hearing, it is hard to argue 
with the FDIC's observation that the current deposit insurance 
system is procyclical.
    In good times, most institutions pay nothing for insurance 
coverage and in bad times, when they can least afford it, there 
is the potential for them to be hit with large premiums.
    Currently, over 92 percent of our banks and thrifts pay no 
deposit insurance premiums. And while it is not always popular 
to say so, I think we need to examine together whether that, in 
fact, makes sense.
    We need to revisit our current system while our banks and 
thrifts are healthy and really think through whether our 
institutions could sustain 23 basis point premiums under less 
favorable conditions--or even now, if fast growth in insured 
deposits caused the fund reserves to dip below the designated 
reserve ratio. At the same time, I think it would be a mistake 
to allow the insurance funds to grow beyond the size necessary 
to ensure the safety of our institutions.
    As many of my colleagues know, I have been concerned for 
some time about our small banks and the troubles they 
increasingly have in attracting core deposits. And any 
legislation we introduce should in some manner address that 
funding problem. I look forward to working with the FDIC on 
comprehensive deposit insurance reform in the coming months.
    One other issue that I will continue to monitor is the 
implementation of the Expanded Guidance for Subprime Lending 
Programs that was issued jointly by the four banking agencies 
earlier this year. As I have noted in a letter to the agencies, 
many have expressed concern to me that the guidance may have 
broader consequences than was originally intended.
    As a general matter, I have been encouraged by the 
increasing number of responsible lenders willing to extend 
credit to consumers who in the past may have had to find 
sources of credit outside the mainstream financial marketplace.
    At the same time, I understand that often times, such 
lending programs may present a higher risk to lenders and I 
appreciate the regulators' vigilance in taking steps to manage 
that risk.
    It is my hope that the regulators, legislators, and the 
lending community can work together to develop standards for 
subprime lending that are clear, that are appropriate, and that 
are balanced.
    I believe it is possible to manage risk and protect 
consumers, while addressing abuses that may have taken place in 
the past, without drying up credit to our communities.
    I look forward to working with the FDIC to ensure that the 
exam guidance is implemented in a way that is consistent with 
the intentions described by the agencies.
    I thank you for your willingness to bear the scrutiny of 
this Committee and I look forward to hearing your thoughts on 
these and other issues this morning.
    Congratulations, Mr. Powell.
    Chairman Sarbanes. Thank you very much, Senator Johnson.
    Senator Enzi.

              COMMENTS OF SENATOR MICHAEL B. ENZI

    Senator Enzi. I thank you, Mr. Chairman, for bringing this 
hearing to us at this time. I know that when the current 
Chairman leaves on July 11, that we will have two vacancies on 
the Board. So, I appreciate anything that you do to expedite 
this one.
    Chairman Sarbanes. Senator Miller.

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. Thank you, Mr. Chairman.
    Mr. Powell and I had a very good meeting a few days go and 
I came away very highly impressed.
    This is another great appointment by President Bush and I 
look forward to working with you. I wish you well and as 
Senator Gramm said, thank you for serving in this arena.
    Chairman Sarbanes. Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. I would concur. I enjoyed very much the 
meeting I had last week with Mr. Powell. I respect the work 
that you had to do when you took over a troubled institution. 
It's a real test of leadership and I congratulate you on that 
and on your work in your community.
    I do think that there are some very important issues, 
particularly the deposit insurance reform issues that Senator 
Johnson talked about. And also the potential merger of BIF and 
SAIF, which I think are key issues. I have other questions over 
a period of time about CRA and other issues, but I think this 
is a great appointment.
    Chairman Sarbanes. Thank you very much.
    Senator Bennett.

             COMMENTS OF SENATOR ROBERT F. BENNETT

    Senator Bennett. I have no statement, Mr. Chairman, other 
than to welcome Mr. Powell and look forward to his service.
    Chairman Sarbanes. Good. We have been joined by our two 
colleagues from the House. We very much appreciate them coming 
over. We understand they would like to make a few remarks about 
Mr. Powell, and we are certainly happy to hear from them.
    Congressman Combest, why don't we go with you first, and 
then Congressman Thornberry.
    I gather you share the Town of Amarillo, so to speak.
    [Laughter.]
    Mr. Powell is somehow or other divided between these two 
Congressmen.
    [Laughter.]
    Congressman Combest.

                   STATEMENT OF LARRY COMBEST

               A U.S. REPRESENTATIVE IN CONGRESS

                    FROM THE STATE OF TEXAS

    Representative Combest. Mr. Chairman, thank you for 
indulging us with a vote and letting us arrive a few minutes 
late.
    We both do proudly share Mr. Powell and Amarillo and we 
appreciate very much your letting us come over, knowing him as 
a personal friend and fully in support, obviously, of his 
confirmation as Chairman of the Federal Deposit Insurance 
Corporation.
    All of you have before you information which I think will 
show the qualifications that Mr. Powell has for the position. 
But what you do not have before you I think is equally as 
important, and that is something that we could speak to, and 
that is respect and admiration that Don Powell has held in his 
hometown.
    There is no one who is more respected in Amarillo, Texas, 
than Don Powell. And he has earned this respect in his 
professional and his personal and his charitable dealings 
throughout that community for many years.
    He has done a great deal for his community and I think, 
more importantly, he has done a great deal for the people in 
that community. And I think that shows the character and the 
personality of Don Powell that probably might not come through 
in looking at many of the things that you have relative to his 
qualifications.
    I think he is amply qualified and as you will see in this 
hearing, Mr. Chairman, Don Powell is just a really nice guy as 
well.
    Thank you very much.
    Chairman Sarbanes. Thank you, Congressman Combest.
    Congressman Thornberry.

            STATEMENT OF WILLIAM ``MAC'' THORNBERRY

               A U.S. REPRESENTATIVE IN CONGRESS

                    FROM THE STATE OF TEXAS

    Representative Thornberry. Thank you, Mr. Chairman, Senator 
Gramm, and Members of the Committee.
    I appreciate also the chance to just say a few words in 
support and admiration really of Don Powell, recognizing, 
however, that his success in life, as is often the case, is a 
result of team work. His partner Twanna is a key part of why 
Don has been such a success.
    I would like to make just a couple brief points.
    One is that Don has worked his way from the bottom to the 
top of the banking industry, starting as a loan officer in 
1963, and he has done it the old-fashioned way. As the 
commercial used to say, he has earned it. He has earned it with 
his intellect, hard work, and integrity, and I know he will 
carry those qualities forward.
    I would also say from my perspective that he led the First 
National Bank of Amarillo during a very tough time in the 
1980's, as many of you know.
    Not only does coming through that time successfully speak 
well of his credentials, but also I think it makes him better 
prepared to be the Chairman of the FDIC.
    Finally, I would just say that I know first-hand that he 
takes community service very seriously. The reason that he has 
been honored as man of the year in Amarillo or history-maker is 
not because he is President of the bank. It is because of what 
he has given to the community, often dealing with young people.
    I hope that maybe at some point you have a chance to get 
into the details, for example, of the Ace Program, where every 
student that goes to the at-risk high school in Amarillo has a 
chance to go to college. It is because of Don's leadership that 
that takes place.
    Community and service are not just words. He lives them, 
and I know he will take that spirit to the FDIC as well.
    Chairman Sarbanes. Thank you. We very much appreciate your 
coming over and giving the Committee the benefit of your 
statements. We know you have pressing schedules, so if you wish 
to excuse yourselves, the Committee understands that, of 
course.
    Mr. Powell, if you will stand, I would like to administer 
the oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Powell. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Powell. Yes, sir.
    Chairman Sarbanes. Thank you very much. We would be happy 
to hear your statement.

                 STATEMENT OF DONALD E. POWELL

             OF TEXAS, TO BE A MEMBER AND CHAIRMAN

                OF THE BOARD OF DIRECTORS OF THE

             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Powell. Thank you, Mr. Chairman.
    Before I make my prepared remarks, if I might, I would like 
to introduce a dear friend who is here today. I am sorry that 
my family is not here. I do have two boys and four wonderful 
grandchildren. My wife is away and she is here with me in 
spirit.
    But part of my extended family is here and it is a 
gentleman that I love very much and served with me at the Texas 
A&M University System Board of Regents, and I am delighted that 
he is here today, and I would like to introduce him--Fred 
McClure.
    Chairman Sarbanes. Good. We are very pleased to have you 
with us, sir.
    Mr. Powell. He is an attorney and from time to time, I kid 
him about being my personal counsel. But, clearly, he is not 
that. He is a dear friend.
    Chairman Sarbanes, Ranking Member Gramm, and Members of the 
Committee, it is a great pleasure for me to appear before you 
today. I am humbled that President Bush has nominated me to 
Chair the Federal Deposit Insurance Corporation. If I am 
confirmed by the U.S. Senate, I give to you my solemn pledge to 
work closely with all Members of this Committee and the other 
financial institutions regulatory agencies to maintain 
stability and public confidence in the Nation's banking and 
thrift systems.
    While I am a newcomer to Washington, DC, I am no stranger 
to the banking industry. For the past three decades, I have 
been involved in virtually every aspect of the banking 
business. In the early 1960's, I started out as a loan officer 
at a small savings and loan in the Texas panhandle, and I 
eventually became President and Chief Executive of the First 
National Bank of Amarillo. During the severe economic downturn 
of the late 1980's, I led, with the assistance of others, the 
difficult but ultimately successful efforts to revive First 
National Bank. Indeed, by 1993, the restoration was complete 
and I take great pride in the fact that our successful 
turnaround was recognized not only by our community and 
shareholders, but also by our Federal regulators.
    Being nominated to this position has great personal 
significance for me. As a long-time banker and a life-long 
resident of Amarillo, I understand how important a strong and 
committed bank is to the citizens of our Nation's communities. 
When we were faced with the challenges of restoring the First 
National Bank to financial health, I understood the severe 
adverse consequences that failure would have brought to all 
segments of our local community. In short, it is from personal 
experience that I can speak directly to the importance of our 
Nation's insured banks and thrifts--they are the financial 
lifelines for all the citizens of all our Nation's communities.
    Our Nation's banking system today is the envy of the world. 
It is vibrant. It is innovative. And it is now strong and 
secure. We have the most professional regulatory and 
supervisory system in the world. But globalization of financial 
services, innovative technologies, and legislatively expanded 
powers and authorities have changed banking dramatically and 
forever. These changes will continue, and they require us to 
deal with issues our predecessors could not have dreamed of. I 
am confident that with its staff of highly qualified and 
dedicated professionals, the FDIC is well equipped to respond 
to these challenging and ever-accelerating developments.
    In assessing the impact of recent developments on the 
financial institutions industry, I am reminded of the immensely 
difficult challenges the FDIC has faced and surmounted in the 
nearly seven decades since its establishment in the midst of 
the Great Depression. Undoubtedly, as the financial markets 
evolve, unanticipated policy questions and developments will 
continue to arise. In the past, I know that the FDIC encouraged 
extensive and rigorous debate in addressing the difficult 
issues of the day. And it is with the same spirit of open 
debate and discussion that I intend to approach the many 
challenging new issues currently on the Agency's agenda, 
including the appropriateness of any structural reform of the 
overall deposit insurance program.
    Let me shift gears for a moment and discuss briefly several 
issues that I know are of great interest to the Members of the 
Committee, your constituents, and the financial institutions 
industry, as expressed to me by Senators these past few weeks, 
namely, the Community Reinvestment Act, ``predatory'' lending 
and privacy.
    The Community Reinvestment Act has been the law of the land 
since 1977. And the Federal Reserve Board recently found that 
the CRA has contributed to the financial health of our Nation's 
communities by bringing credit to localities that, in the past, 
have been underserved. As a banker, I also well understand the 
significant challenges all insured financial institutions face 
in complying with the rigorous requirements of the CRA. As you 
may know, the regulatory agencies, including the FDIC, are 
about to embark on an extensive review of the CRA regulations. 
I am anxious to be part of this process and to learn more from 
all interested parties, including bankers and community groups, 
whether any changes are needed to make the CRA more effective. 
I also look forward to exploring with the staff of the FDIC and 
the other agencies how the changes made to the CRA by Gramm-
Leach-Bliley have affected insured financial institutions and 
the communities they serve.
    Another issue about which I share the Committee's deep 
concern involves financial institutions engaging in what 
generally has been referred to as ``predatory'' lending or 
``predatory'' pricing. From my perspective as a professional 
banker, I can say that the application and enforcement of 
normal bank underwriting guidelines can go a long way toward 
eliminating this practice. I look forward to working with the 
FDIC staff and other agencies to determine how we might 
effectively bring an end to this abusive practice.
    Finally, with the explosion of personal information 
maintained on individuals coupled with the growth of the 
computerized storage of such information, I recognize that 
privacy is becoming a critical issue for many consumers. As you 
know, for the first time, Gramm-Leach-Bliley imposed a set of 
privacy guidelines on financial institutions. I look forward to 
observing how well these provisions are working in practice. 
After time, if necessary, I will apprise the Committee of the 
necessity and appropriateness of any statutory enhancement to 
existing protections.
    Chairman Sarbanes, Ranking Member Gramm, and Members of the 
Committee, obviously, I have just touched upon a few of the 
most important issues facing the FDIC. Let me assure you that, 
in addressing this formidable array of legislative and 
regulatory challenges, I will never lose sight of what I view 
to be the central mission of the FDIC: Protecting depositors, 
ensuring the safety, soundness, and financial integrity of 
America's banks and thrifts, as well as the ready availability 
of the essential financial services provided by these 
institutions to all Americans.
    Thank you for inviting me to appear before you today. I 
look forward to working with the Committee in the future.
    I would be pleased to respond to your questions and 
concerns.
    Chairman Sarbanes. Thank you very much, Mr. Powell, for 
your statement.
    Last week, this Committee held an oversight hearing with 
the bank regulators. I assume you have had a chance to be 
briefed on that hearing.
    But in any event, the FDIC, of course, has recently made 
recommendations with respect to the Nation's deposit insurance 
system, involving risk-based premiums, required reserve ratio, 
rebates, merging the BIF and the SAIF funds, and the amount of 
insurance coverage per account. Have you had a chance to think 
through your reaction to these recommendations? Or how do you 
view them? I am not pressing you. You may need some time in 
there as the Chairman before you can make any definitive 
statement. But tentatively, at least, how do you view what they 
have laid out on the table?
    Mr. Powell. Mr. Chairman, first of all, I compliment the 
FDIC and its staff for their thorough review of this important 
mission that they have just concluded. I believe they spent 
some 12 to 15 months analyzing this and had input from various 
communities.
    I have read the recommendations. I am not sure that it 
would be prudent for me to come with any definitive conclusions 
at this time without making sure that, in fact, I have heard 
all voices that had input into these important matters. I 
understand the recommendations and I think it is premature for 
me to come to some definitive conclusions without hearing from 
others.
    Chairman Sarbanes. Well, I think that is a prudent 
statement.
    One of the things that came through, though, at the hearing 
was the view that these recommendations were part of a package, 
that really, to move on one, you should move on another and 
that you ought to take them in their totality and not just pull 
one out of the package. Do you tend to agree with that 
observation?
    Mr. Powell. I am not sure that I recognize the importance 
of their recommendation. I am not sure that it is critical that 
we link all of the recommendations together at one time.
    Again, I would want to review and hear from those that had 
input into it, but perhaps there are more important 
recommendations and we might rank those recommendations. I 
don't think that it is important that they all be linked 
together, per se.
    Chairman Sarbanes. Every time there is a change of command 
at the FDIC, we get contacted by constituents who worry about a 
reduction in force and that employees who have developed this 
expertise at the Agency may be let go.
    It seems to me that there are plenty of challenges for the 
FDIC, so I start, I guess, from the premise that I don't see a 
need for the workforce to--it has been reduced in the past. I 
am not sure that process needs to continue.
    But in any event, it would seem to me that some premium 
should be placed on reassigning employees within the FDIC to do 
other types of work, if there are certain areas in which the 
Agency undertakes some downsizing. And often, they can be 
reasonably trained, I think, to pick up a different line of 
activity, which is being done by outside attorneys or other 
professionals.
    Now there is a bargaining agreement that the Agency has 
with the representatives of the employees. Could you work with 
those organizations in dealing with the staffing issues, 
particularly along this path of cross-training people so that 
if the workload ebbs in certain areas and flows in others, the 
people can move with the workload?
    Mr. Powell. I would be very sensitive to the comments that 
you have made, Senator. Yes.
    Chairman Sarbanes. I think our view is that, generally, a 
very competent staff has been assembled at the FDIC, with a 
high level of professionalism, a high level of expertise and, 
of course, we are anxious to sustain and maintain that. 
Obviously, as Chairman, I presume it would be one of your prime 
responsibilities.
    Mr. Powell. Yes, sir.
    Chairman Sarbanes. Senator Gramm.
    Senator Gramm. Thank you, Mr. Chairman.
    The last thing I want to do, Don, is force you into 
discussing controversial issues. So, probably, the most logical 
thing for me to do, instead of asking you where you stand on 
these issues, would be simply to take the few moments I have to 
talk about these issues.
    The first issue related to the FDIC, which is very much in 
debate now, is whether the insurance limit should be raised.
    The argument for is that it would help small banks attract 
deposits. The argument against is that anyone who remembers the 
terrible days of the S&L crisis, when you had brokered 
deposits, saw this incredible flow of deposits into banks that 
were clearly insolvent in $100,000 increments, greatly 
destabilizing the system.
    We were in the terrible position of not having the money to 
close these institutions down.
    I remember sitting exactly where Senator Miller is now 
throughout this whole debate. So it had a profound effect on my 
thinking. I think that experience is the primary reason that I 
am opposed to raising the deposit limits.
    Deposit insurance is very important for small depositors. 
But it is important that large depositors look at the stability 
of banks and that is part of the disciplining process for 
banks.
    The second issue that you are going to run into is 
predatory lending. Even though I have thought about it as much 
as anybody in the Senate, I am still not yet sure what this 
issue is about.
    I have no doubt, with the huge numbers of lenders, that 
some are abusive. And I don't have any sympathy for crooks.
    My concern, however, is that I am beginning to see a 
proliferation of lending where banks are using their improved 
marketing skills to find people with marginal credit who cannot 
get loans at prime, but can get access to the credit market at 
subprime rates.
    I guess I am sensitive to it because my momma borrowed 
money from a finance company to buy a house. And she paid a 50 
percent premium to borrow that money. Some people might look at 
that as predatory lending. But given the circumstances of my 
household, banks were not going to make that loan.
    The net result of that loan is that my mother was probably 
the first person in her family since Adam and Eve ever to own 
the house she lived in.
    I would call that, from the point of view of family-
building, about as important a loan as you could make. I don't 
remember the name of the finance company, but they were public 
benefactors.
    I want to be sure, in the name of combating predatory 
lending, that we don't deny access to credit for people who 
don't have perfect credit ratings, don't have stable jobs, and 
have difficult family situations.
    I would just ask you, in looking at this, to ferret out 
abuses. But we don't want to institute law or regulation that 
simply produces a situation where the easiest thing to do is 
simply not to make marginal loans.
    The final issue which you are going to run into is privacy. 
You mentioned it in your opening statement, and I would just 
like to say that I am sensitive to privacy--I value my own 
privacy.
    But I am very much moved by the fact that, as I look at 
economic data, about 20 percent of the cost of anything we buy, 
on average, is attributable to the cost of bringing buyers and 
sellers together. And whatever we can do in using market 
information to eliminate that cost, we can raise the standard 
of living for ordinary people dramatically.
    So, you have a real question of what it means to protect 
``privacy.'' I get every gun magazine, every hunting magazine, 
every dog food and dog medicine magazine, and catalogue --I 
guess because I subscribe to Gun Dog magazine. Is that a 
violation----
    Senator Dodd. You have dogs, don't you?
    Senator Gramm. I have dogs.
    Senator Dodd. You had me worried there.
    [Laughter.]
    Senator Gramm. Is that a violation of my privacy? Or am I 
better off as a result of it?
    I do not get a Neiman-Marcus catalogue. They probably have 
looked at my consumption patterns and decided that I am not a 
good candidate for a $14 catalogue.
    Senator Dodd. Bet you are going to get one now.
    [Laughter.]
    Chairman Sarbanes. There is an open invitation for a 
Neiman-Marcus catalogue.
    [Laughter.]
    Senator Dodd. You are on C-SPAN here.
    Senator Gramm. Wait a minute.
    [Laughter.]
    I need to end because the red light is on. But I would say 
this--I have been using that analogy on this issue for 3 years. 
I have not yet received a Neiman-Marcus catalogue, and I should 
not get one. It costs them, I understand, $14 to send, and it 
is not a good investment of their money to send one to me.
    Now, is my privacy violated by the fact that Neiman-Marcus 
has figured out that I am not a good potential customer, 
whereas, a veterinary catalogue probably is?
    I think that is a question we must come to grips with. It 
is not that they are interested in my private life or any of 
that kind of business. They want to know, am I buying dog food 
or am I buying luxury items? And am I poorer by their knowing, 
or is my privacy violated?
    So, I just want you to pray hard over these things when you 
are making decisions, because I think they are very, very 
important. They may not be clear. They may not be black and 
white. But, gosh, they are very important.
    Thank you for your indulgence, Mr. Chairman.
    Chairman Sarbanes. Thank you very much.
    Senator Miller.
    Senator Miller. I don't have any questions, Mr. Chairman.
    Chairman Sarbanes. Senator Bennett.
    Senator Bennett. No thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. First of all, Mr. Powell, I want to 
congratulate you for not responding to Senator Gramm.
    [Laughter.]
    You are one smart cookie. You are going to do fine.
    [Laughter.]
    Mr. Powell. He is one of those important voices that I 
hear.
    [Laughter.]
    Senator Dodd. I know. That is always a good test for me. 
This compulsion to feel like you have to respond to everything 
that gets said up here. That is a good indication that you are 
going to do fine in this job.
    Congratulations to you and welcome. You have a wonderful 
background and experience.
    Just to follow up on Senator Sarbanes, you are taking over 
from a wonderful individual that many of us have worked with. I 
told a story the other day about her coming to my State. It 
literally took a day for her to get there with the terrible 
weather. It may not have been cosmic in scope, but there are 
400 or 500 people up there who dedicated a good part of their 
professional lives to help out in dealing with these issues in 
Connecticut, and she came up and met with them, and we are very 
grateful.
    You cannot do that all the time, obviously, in terms of 
allocation of your own time. But it is tremendously helpful.
    Senator Gramm has mentioned his concerns about predatory 
lending. And just for my purposes here, we are not interested 
in putting undue restrictions on institutions. But for people, 
to take the very example that the Senator from Texas talked 
about--people who are on the margins--and to be able to own 
their own home and get started is tremendously important. And 
making it possible for them to do it so that they don't fall 
back.
    Many of our laws are not written for good people. They are 
written for that small, or relatively small, percentage that 
violates the law and takes advantage of people.
    We probably do need to look at it. It is more than just 
anecdotal, I am afraid. And obviously, your advice and counsel 
on that is something that we will be anxious to receive.
    Privacy issues are very complicated, but very serious as 
well. And again, I think that all of us appreciate the needs of 
businesses to be able to market. We also know that there are 
those out there who will take information and use it for less 
than just purely business purposes, and we are worried about 
that.
    I can tell you, I don't care which State you go to, this is 
right under the surface with people. It is an explosive issue 
and it needs to be handled well because there are unintended 
consequences of well-intended legislation, whether it is in the 
area of health care information or business and financial 
records of individuals.
    It needs work, but it is serious and people are worried 
about it.
    Just as an aside, it is been several years now, I told the 
story of being with a friend of mine who was in the business of 
collecting data and was trying to make a decision on whether or 
not to invest in a company that literally had in the backseat 
of an automobile a personal computer and a printer in which 
they could literally read a license plate and take down that 
license plate, program it, and provide about a foot and a half 
worth of public data, now.
    This was public information that was available. I suspect 
that I knew more about the owner of that automobile than he or 
she knew about themselves in terms of what was available 
through public information. And to the extent that this 
information is available and then gets used and shared in ways 
that could be harmful to people, and a lot of it can be 
misinformation, false information, as well it could be 
tremendously damaging to people.
    Whether it is health care records or financial records, the 
kind of information being collected from children, parents, and 
individuals who want to have a greater sense that they can be 
protected. We need to work at that and obviously, your counsel 
and advice is something that I would look forward to hearing.
    These are two very important questions.
    I again thank Senator Sarbanes for raising the issue about 
the personnel of the FDIC. We have been very impressed with 
them over the years.
    We passed Gramm-Leach-Bliley about a year and a half ago. I 
wonder, just as someone who has been in the banking field, how 
you see this legislation. Have you seen any effects on small- 
and medium-sized banks as a result of the passage of that bill, 
just in the short time since its adoption?
    Mr. Powell. Senator, I think it is too early for us to 
assess the consequences. I think that there are some great 
opportunities and the legislation allowed banks to diversify 
the risk.
    At the same time, I think there were some parts of it that 
we just don't know how effective it is going to be and time is 
going to tell us more as we go forward.
    I have not heard any strong voices from the banking 
community that there is anything in there that is bad, per se, 
that they cannot live with. But I think the voices have been 
rather mute. We don't know yet. Several institutions are 
attempting to take advantage of some of the new opportunities 
and we will just have to wait and see what happens.
    Senator Dodd. Thank you very much. We wish you well. We 
look forward to working with you.
    This is probably a subject matter at some point, Mr. 
Chairman, not now, but maybe in a year or so, that we might 
want to take a look and see how the the Gramm-Leach-Bliley bill 
is doing.
    Chairman Sarbanes. Well, it was such a difficult struggle. 
Why don't we let it settle a bit?
    [Laughter.]
    Senator Dodd. I said a year, year and a half or so.
    [Laughter.]
    Thank you very much, Mr. Chairman.
    Thank you, Mr. Powell.
    Mr. Powell. Thank you, sir.
    Chairman Sarbanes. Let me just make this observation.
    You are coming in, I think, at a very challenging time. I 
was just looking at a review of some indicators.
    First of all, after 5 very good years, the rate of 
nonperforming commercial and industrial and personal loans 
increased by over 26 percent in the year 2000. While 
delinquency rates for credit card and consumer loans are below 
the high levels that we experienced during the last economic 
downturn back in 1992, they have risen back to levels 
comparable to 1993.
    Consumer leverage seems to be at an all-time high. Credit 
card debt is rising rapidly. Debt service payments now 
constitute over 14 percent of disposable income.
    The mortgage bankers tell us that 10 percent of the 
mortgages backed by the Federal Housing Administration are now 
30 or more days delinquent. In fact, The New York Times said 
just a few days ago, ``that the mortgage problems underscore 
one main reason many policymakers and economists are so 
concerned about whether the United States will enter a 
recession this year.''
    We have had the percentage of commercial and industrial 
loans that are noncurrent--that is, delinquent--there has been 
an increase in the amount held by large banks, not by small 
banks, apparently.
    There are a lot of concerns out there, I think, as you take 
over. Obviously, you will need to review all of that.
    I think the FDIC may well have to consider intensifying its 
examination of these issues without at the same time cutting 
off the appropriate flow of credit. That is always a problem 
and we are very much aware of that.
    We have contradictory objectives. We have a downturn. The 
Fed has been cutting the rates, obviously, to stimulate 
economic activity. Presumably, they will cut them again 
tomorrow. The Open Market Committee is meeting right now.
    On the other hand, when you have a worsening economic 
situation, you have a deterioration in some of your credit 
standards.
    So how do you make sure that they are not extending credit 
where it shouldn't go without cutting off economic activity?
    I think that is going to be a very sort of first-item 
challenge on your agenda.
    Now, we had the benefit of the four regulators last week 
before the Committee. We just did a straight oversight 
committee. It was not prompted by some crisis situation. We 
thought just as a standard practice, we should do that from 
time to time.
    Of course, we had the current Chairman, your predecessor 
here. Your coming in now, so you have a chance, one, to examine 
what they told us and, two, to examine the Agency's activities 
with a fresh perspective, and we certainly invite you to do 
that.
    Chairman Tanoue told us on this sub-prime lending issue 
that the FDIC has intensified our supervisory attention to the 
roughly 150 banks and thrifts with sub-prime lending programs.
    Senator Gramm made a reasonable point. We have a sub-prime 
market. We are not trying to dry that up. We just want to get 
at the excesses that are taking place.
    In fact, I was struck in your statement by your reference 
that the application and enforcement of normal bank 
underwriting guidelines could go a long way toward eliminating 
the practice. What you have is these loans, in some instances 
being made unrelated to the borrower's ability to repay and 
solely based on the equity and the collateral, which they then 
proceed to strip away from them over time by the fees, 
refinancing, and all the rest of it. So, they never relate it 
to their ability to pay it back. It is just whether they are 
holding enough equity, that they can strip it away from them.
    I think there is something that the FDIC and other 
regulators can do to monitor the sub-prime lending market. And 
the other regulators are looking at this issue, as you know, 
and of course, we invite the FDIC to do so as well.
    We look forward to working with you. I think as you have 
stated in your statement, it is a real challenge.
    I understand that you are in a position and intend, if 
confirmed, to abide by all the conflict requirements, which in 
your instance, since you are coming right out of the banking 
industry, are quite extensive.
    But we understand you have undertaken that obligation or 
are in a position to do that. And of course, that is part and 
parcel of moving forward into this position.
    With that, the Committee will conclude. Members may have 
some questions that they will want to submit to you. I am not 
certain if they do. We hope you will answer them promptly and 
get them back to us.
    Mr. Powell. Thank you, sir.
    Chairman Sarbanes. The Committee stands adjourned.
    [Whereupon, at 10:55 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketch of the nominee, 
and response to written questions follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    I would like to welcome Mr. Donald E. Powell before the Banking 
Committee this morning.
    The President has nominated Mr. Powell to be a Member of the Board 
of the Federal Deposit Insurance Corporation and to serve as its 
Chairman. His nomination papers were completed as of June 11, 2001. I 
have scheduled this confirmation hearing as expeditiously as possible. 
Mr. Powell earned a B.S. in Economics from West Texas State University 
and studied at the Southwestern Graduate School of Banking at Southern 
Methodist University.
    Mr. Powell has spent his professional career in the community 
banking industry in Texas. From 1971 to 1997, Mr. Powell worked for the 
First National Bank of Amarillo, in which he became Chairman and CEO in 
1987. He managed the bank through the financial difficulties that banks 
experienced during the mid-1980's. The bank grew to $800 million in 
assets and was acquired in 1993 by Boatman's Bancshares, which in turn 
was acquired in 1997 by NationsBank.
    Shortly thereafter, Mr. Powell purchased a small bank which he 
renamed First National Bank of Amarillo. That institution, for which he 
serves as Chairman and Chief Executive Officer, operates six branch 
offices in Texas with over $360 million in assets. The bank offers 
traditional retail and commercial bank and trust services, as well as 
management services for farm, ranch, oil and gas assets.
    Mr. Powell has been active in his community. He has been Chairman 
of the Board of Regents of the Texas A&M University system, which has 
over 90,000 students. Mr. Powell has also served on the boards of many 
other nonprofit, public, and community organizations, including the 
United Way, Harrington Regional Medical Center, High Plains Baptist 
Hospital, City of Amarillo Housing Board, Amarillo College, and West 
Texas State University Foundation.
    The Chairman of the FDIC plays a critical role in maintaining the 
strength of the U.S. banking system. He makes important decisions on 
complex issues affecting the Federal deposit insurance system, the 
oversight of the safety and soundness of bank operations and many other 
aspects of the financial markets.
    We look forward to hearing the testimony of Mr. Powell before the 
Committee.
                               ----------
               PREPARED STATEMENT OF SENATOR JIM BUNNING
    Mr. Chairman, I would like to thank Don Powell for testifying today 
and I would like to thank you for holding this hearing in such an 
expeditious fashion.
    I think President Bush has once again demonstrated that he will 
continue to ask outstanding people to serve in his Administration.
    Obviously, Mr. Powell has a great deal of experience in the banking 
industry. I think he will do a fine job at the FDIC.
    I hope that the Committee will report this nomination, once we get 
our own organization settled, in an expeditious manner.
    Once again, I urge all of my colleagues to accept Mr. Powell's 
nomination.
    Thank you, Mr. Chairman.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM DONALD 
                           E. POWELL

Supervision and Regulation

Q.1. In the 1990's, the Federal Deposit Insurance Corporation 
established a Division of full-time examiners responsible for 
compliance and consumer affairs that is entirely separate from 
the Division of Supervision, which examines for bank safety and 
soundness. Do you support this type of organizational structure 
and feel that it promotes effective supervision?

A.1. The examination and supervision of financial institutions 
continues to become more and more complex. New products 
(including products designed to serve low- and moderate-income 
individuals) and services, competitive pressures, management 
and technology issues, among others, all contribute to the 
complexities faced by both financial institutions and their 
regulators. I do see some benefit to the existing FDIC 
structure for examination and supervision, which provides for a 
specialized examination workforce for the compliance and 
consumer affairs and safety and soundness areas. From the 
perspective of financial institutions, I believe it is vitally 
important that two goals are met: That they are sent a clear 
and uniform message about their financial and regulatory 
standing and that the examination process is not unduly 
burdensome. Thus, it is critical that the compliance and 
consumer affairs exam function is closely coordinated with the 
safety and soundness examination function. If confirmed as 
Chairman, I will work hard to ensure those goals are met and 
that the FDIC provides the industry and the public with a high 
level of service.

Liquidity and the Federal Home Loan Banks

Q.2. Over the last decade, core deposits have declined as a 
percentage of bank and thrift assets, as individuals have taken 
advantage of new investment options. Declining deposits have 
forced banks to look elsewhere for sources of liquidity. Small 
community banks, which may have limited access to alternative 
funding sources, are increasingly relying on advances from the 
Federal Home Loan Banks as a way to meet their liquidity needs. 
What are your views on this development and its implications, 
if any, for the financial services industry?

A.2. As a community banker, I can fully appreciate that the 
competition for core deposits is intense. Depositors have many 
choices about where to place their funds, both inside and 
outside the banking system, and the range of choices continues 
to grow. That is a healthy trend, but it means that fewer banks 
can fund their loans solely through deposits generated from 
within their communities. The prudent use of Federal Home Loan 
Bank advances can be a valuable source of liquidity; especially 
advances with intermediate and longer terms. Of course, FHLB 
advances like any liability investment, can be misused. My 
expectation is that the inappropriate use of advances, like 
other deficiencies in risk-management at individual banks can 
be addressed on a case-by-case basis through the examination 
process.
Too Big to Fail

Q.3. Former Federal Reserve Board Vice Chairman Alan Blinder 
was quoted in the June 4 American Banker stating that 
``everybody knows that there are institutions that are so large 
and interlinked with each other that it is out of the question 
to let them fail.'' Dr. Blinder's statement contrasts with 
official Federal Reserve Board policy and Fed Vice Chairman 
Roger Ferguson's recent declaration that ``no institution is 
too big to fail.'' Vice Chairman Ferguson has also observed 
that, ``After consolidation some firms shift to riskier asset 
portfolios, and consolidation may increase operating risks and 
managerial complexities.'' Please discuss your views as to 
whether some institutions are too big to fail and how your 
views would impact the FDIC's policies and practices regarding 
supervision and insurance.

A.3. In 1991, in the Federal Deposit Insurance Corporation 
Improvement Act (FDICIA), Congress prohibited protection of 
uninsured depositors and unsecured creditors if protection 
would increase the cost to the FDIC. Congress allowed only one 
exception, known as the systemic risk exception, to this 
general prohibition. The exception was crafted to ensure that 
it would be rarely invoked, and, in fact, it has not been 
invoked.
    The mere possibility of a systemic risk determination, 
however, and full protection for all depositors and all 
creditors, may create a public perception that some insured 
institutions are still too big to fail. That perception, if it 
exists, likely exacerbates that misperception. I know from my 
own experience as a community banker that many community banks 
also believe that the possibility of a systemic risk 
determination gives very large institutions an unfair 
competitive advantage. Nothing in the law, however, requires 
that uninsured depositors and creditors be made whole even if a 
systemic risk determination is made. Blanket protection for all 
is not and should not be guaranteed.
    A systemic risk determination would also pose problems for 
the deposit insurance funds, not merely because of the 
potential for large losses. If a systemic risk determination is 
made, the FDICIA requires that the extra costs be recovered 
through special assessments on the affected fund's members 
based essentially on average total liabilities minus 
subordinated debt. As the FDIC noted in its Options Paper, the 
funding arrangements for systemic risk raise several issues 
such as the procyclical nature of this special assessment, and 
the fact that small banks would still be required to pay for a 
systemic risk determination even though they would never 
receive similar treatment if distressed. If confirmed as 
Chairman, I would welcome the opportunity to work with Congress 
to address this important public policy issue.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER FROM DONALD E. 
                             POWELL

Q.1. Mr. Powell, as a banker, you experienced the financial 
difficulties of the 1980's in Texas. What was your philosophy 
for dealing with problem banks then and how has that experience 
played a role in your approach to banking and resolving problem 
banks today?

A.1. As you know, my perspective is that of a banker who 
survived the 1980's and 1990's, but had a problem bank at one 
point. I felt the most effective way to return a troubled bank 
to health was to address the bank's problems directly and 
aggressively. I also found it advantageous to work closely and 
honestly with regulators, who had an interest in our success. 
While timely corrective action can go a long way toward 
addressing a bank's problems and reducing the losses in the 
event of failure, I also believe that it is important for 
supervisors, within reason, not to overreact and unduly limit 
an institution's ability to correct its problems. In short, a 
private resolution that results in a viable bank is always 
better than receivership.
    There is no formula that will tell regulators exactly what 
to do in every situation. The correct response calls for sound 
judgment, common sense, and measured steps. I believe that 
combining my own experience at a troubled bank with the 
experience and expertise of the FDIC's professional staff, we 
will be able to strike a proper balance in the supervision of 
problem institutions. If confirmed, I also anticipate that I 
will continue to look for ways to improve the supervision 
program for all institutions, including those not experiencing 
problems.

Q.2. As you know, the FDIC sits with the other banking 
regulators on the Federal Financial Institutions Examination 
Committee (FFIEC), the Capital Markets Working Group, and other 
interagency committees. What will be your approach to the 
FDIC's participation on these committees?

A.2. The Federal Financial Institutions Examination Council and 
related interagency working groups and committees provide a 
necessary venue for the regulators of the banking, thrift, and 
credit union industries to coordinate the development of 
uniform supervisory standards and polices. Significant issues 
that affect all insured depository institutions, such as 
examination standards, capital adequacy, the CRA, money 
laundering, and the like, have been addressed by the FFIEC in a 
coordinated fashion. The FFIEC also serves as a focal point of 
coordination with State supervisors. Coordination of uniform 
supervisory policies across the financial services industry is 
critical to ensure a ``level playing field'' and aids the 
development of the least burdensome, most effective response to 
supervisory concerns. Participation in interagency committees 
helps the regulators to achieve these goals. If confirmed, I 
would expect that the FDIC will be an enthusiastic participant 
in the FFIEC and the other interagency committees.

Q.3. The FDIC participates in the Basel Supervisors Committee, 
as well as other international bilateral forums on deposit 
insurance issues. What is your view as to the FDIC's role in 
the international financial community and dealing with 
countries that look to the FDIC for their expertise in issues 
surrounding deposit insurance?

A.3. The FDIC is the world's premier deposit insurance entity. 
Its participation in international efforts to achieve financial 
stability through bank supervision, deposit insurance, and 
failed bank resolution techniques is critical. As I mentioned 
in my testimony, one of the challenges we face as regulators is 
the globalization of the banking system. Banks today operate 
worldwide and coordination of the regulation and supervision of 
these institutions is exceedingly important. I would anticipate 
that the FDIC, along with the other U.S. regulatory 
authorities, will continue to be active participants in these 
on-going efforts. More broadly, we live in a global economy. 
Economic upheavals in Mexico, East Asia, and Russia over the 
last decade have demonstrated that, however distant a financial 
crisis may appear, it can significantly impact this country's 
economy and its banking system. Consequently, the FDIC's 
international activities can have a significant domestic 
benefit. In addition, I am certain that there are lessons that 
the FDIC can learn from the experiences of other nations in 
administering their deposit insurance systems and in bank 
supervision, more generally. If confirmed, I intend for the 
FDIC to continue its international role.
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